/ 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

RIVERSIDE 


Ex  Libris 
[    C.  K.  OGDEN    1 


A  THEORY   OF   INTEREST 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   •    CHICAGO  •    DALLAS 
ATLANTA   •    SAN    FRANCISCO 

MACMILLAN  &  CO.,  LIMITED 

LONDON   •    BOMBAY  •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  LTD. 

TORONTO 


A 

THEORY   OF   INTEREST 


BY 

CLARENCE   GILBERT   HOAG,   A.M. 


THE   MACMILLAN   COMPANY 
1914 

All  rights  reserved 


COPYRIGHT,  1914, 
BY  THE  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.    Published  February,  1914. 


Nortoooti 

J.  8.  Gushing  Co.  —  Berwick  &  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


MY   MOTHER 


PREFACE 

THE  purpose  of  this  book  is  not  to  give  a  history  of 
the  problem  of  interest  or  to  discuss  in  detail  all  the 
supposed  solutions  of  it,  but  to  try  to  solve  it  correctly. 

The  importance  of  a  correct  solution  can  hardly  be 
overestimated.  Millions  of  men  now  call  themselves 
party  Socialists  in  countries  where  that  party  is  com- 
mitted to  the  Marxian  doctrine  of  interest,  according  to 
which  interest  is  due  to  the  exploitation  of  wage-earners 
by  capitalists.  Millions  of  men,  in  other  words,  on 
account  of  the  theory  of  interest  they  have  accepted, 
regard  themselves  as  robbed  by  capitalists.  By  many 
party  Socialists  in  the  United  States  and  elsewhere, 
indeed,  the  view  is  held  that  the  capitalists  themselves 
fully  understand  how  the  system  robs  the  wage-earners, 
and  sustain  universities,  whose  professors  defend  it,  not, 
as  they  pretend,  primarily  for  the  advancement  of  learn- 
ing, but  primarily  for  the  perpetuation  of  organized 
injustice.  Such  is  the  attitude,  I  say,  of  millions  of 
persons  at  one  end  of  the  scale  of  political  opinion. 
At  the  other  end  of  the  scale  are  the  business  men  — 
the  "bourgeoisie,"  in  the  Marxian  terminology — who  in 
fact  do  not  see  any  injustice  in  the  receipt  of  interest, 
and  who  therefore  in  turn  view  the  party  Socialists  as 
men  who  would  rob  them  of  their  just  accumulations. 
Neither  group  respects  or  understands  the  other.  And 
the  root  of  the  whole  misunderstanding,  which  breaks 
out  into  bitter  struggles  and  dynamite  plots  today 


Vlll  PREFACE 

and  which  may  break  out  into  civil  war  before  long,  is  a 
difference  in  accounting  for  the  surplus  called  interest. 
Marx's  theory,  which  is  accepted  by  acclamation  by 
many  wage-earners,  seems  wholly  untrue  to  the  few 
capitalists  and  the  many  professional  economists  who 
inquire  into  it.  The  theories  of  the  professors  and  the 
capitalists,  on  the  other  hand,  are  hard  to  understand, 
and  hopelessly  at  odds  with  each  other.  To  the  few 
leaders  among  the  wage-earners  who  inquire  into  them, 
therefore,  they  are  quite  unconvincing.  So  the  mis- 
understanding and  the  recriminations  go  on,  and  the 
political  sky  is  full  of  warnings. 

All  that  is  needed  is  light  and  moral  courage.  The 
light  must  come  from  those  who  study  the  problem  of 
interest  deeply  and  honestly.  The  courage  must  be 
furnished  by  the  leaders  of  those  political  groups,  in  all 
lands,  whose  conceptions  of  interest  must  be  modified 
in  accordance  with  the  light. 

Though  inclined  by  my  natural  sympathies,  on  under- 
taking the  study  of  interest,  to  take  sides  with  the  poor 
rather  than  with  the  rich  if  I  could  do  so  with  intel- 
lectual sincerity,  I  was  concerned,  above  all  things,  to 
discover  the  truth.  And  my  conclusion  is  that,  provided 
only  a  person's  capital  itself  is  equitably  his  own,  his 
title  to  the  interest  accruing  from  it  is  as  good  as  his 
title  to  the  earnings  of  his  hands. 

Here,  of  course,  the  Marxians  and  the  Anarchists 
among  my  readers  will  be  inclined  to  throw  the  book 
aside  because  its  conclusion  conflicts  with  their  own. 
To  such  readers,  therefore,  I  want  to  address  two 
paragraphs. 

You  who  believe  that  interest  is  robbery,  who,  indeed, 


PREFACE  ix 

as  you  would  say,  know  that  it  is  robbery,  you  who  are 
sure  that  perpetual  motion  is  as  impossible  in  finance  as 
it  is  in  mechanics,  do  you  dare  to  read  this  book  and 
then  to  act  honestly  according  to  your  convictions  ? 
If  interest  does  not  involve  perpetual  motion  in  finance, 
and  if  it  is  involved  in  the  very  make-up  of  the  world, 
nothing  is  to  be  gained  by  failing  to  understand  the 
truth  about  it  and  to  modify  your  political  and  economic 
programs  accordingly. 

Wage-earners  and  capitalists  can  understand  each 
other  and  work  together  for  the  common  good,  as  they 
cannot  do  now,  just  as  soon  as  they  agree  on  the  interest 
problem  ;  and  they  will  agree  on  that  problem,  obvi- 
ously, as  soon  as  they  both  see  the  truth.  The  capi- 
talists are  approaching  the  truth,  under  the  guidance  of 
the  professional  economists,  who  in  the  main  are  quite 
honest  men.  It  is  to  be  hoped  that  the  wage-earners 
will  approach  the  same  truth  from  their  side,  under  the 
guidance  of  their  leaders,  of  whom,  perhaps,  you  are 
one.  To  understand  the  interest  problem  will  call  for 
time  and  thought,  but  surely  they  are  well  bestowed 
for  so  great  an  object.  To  defend  the  truth  among 
those  who  now  oppose  it  will  call  for  moral  courage. 

Of  the  professional  economists  I  must  ask  indulgence 
for  using  a  terminology  containing  more  new  words  and 
meanings  than  will  at  first  seem  to  them  necessary. 
My  defence  is  that  my  whole  theory  is  cast  in  a  fresh 
mould,  and  I  could  not  bring  myself  to  be  satisfied  with 
expressing  it  in  terms  shaped  by  their  associations  with 
theories  that  will  not  fit  my  mind.  I  venture  to  hope 
that  I  have  thrown  enough  light  on  the  problem  to  be 
partly  excused  for  my  innovations. 


X  PREFACE 

The  keystone  of  economic  theory  is  the  conception  of 
value.  Without  a  correct  theory  of  value  it  was  impos- 
sible to  work  out  a  correct  theory  of  interest,  and  with- 
out a  correct  theory  of  interest  it  was  impossible  to  work 
out  correct  theories  of  price  and  of  distribution.  This 
book  makes  in  the  theory  of  value  some  modifications 
that  seem  to  me  important. 

If  my  theory  is  to  be  called  by  a  brief  name,  it  should 
be  called  the  nominal  value  theory,  for  the  keystone  of 
it  is  my  conception  of  nominal  value. 

The  author  to  whom  I  owe  most  is  Professor  von 
Bohm-Bawerk,  whose  Capital  and  Interest  and  Positive 
Theory  of  Capital  were  very  helpful  to  me.  The  follow- 
ing gentlemen  have  extended  to  me  various  courtesies, 
and  it  gives  me  pleasure  to  record  my  obligation  to 
them :  Professors  Patten  and  McCrea  of  the  University 
of  Pennsylvania ;  Clark,  Seager,  and  Mussey  of  Colum- 
bia ;  Taussig  and  Carver  of  Harvard ;  Barrett  and 
Wilson  of  Haverford  College ;  Mr.  J.  A.  Hobson  of 
England;  Mr.  Cyril  A.  Ward  of  Lausanne,  Switzer- 
land; Mr.  Arthur  H.  Thomas  of  Haverford,  Pa.;  and 
Mr.  Charles  L.  Serrill  and  Dr.  C.  W.  Macfarlane  of 
Philadelphia.  Mr.  Ward  was  very  kind  in  helping  me 
in  regard  to  the  algebraic  formulae.  Most  of  all  I  am 
indebted  to  my  wife.  Without  her  encouragement  and 
cooperation  I  could  not  have  written  the  book  at  all. 

CLARENCE   GILBERT   HOAG. 

HAVERFORD,  PA., 
April  15,  1913. 


CONTENTS 

CHAPTER  PAGE 

I.    THE  PROBLEM i 

II.     SOME  DEFINITIONS  AND  FUNDAMENTAL  CONCEPTIONS  11 

III.  THEORY  OF  NORMAL  PRICES 34 

IV.  INTEREST  AS  A  PRICE 47 

V.     RELATIONS    OF    THE    INTEREST    PROBLEM    REPRE- 
SENTED GEOMETRICALLY 90 

VI.     CAUSES  OF  THE  NORMAL  RATE  OF  INTEREST  .        .100 

VII.  OTHER  THEORIES  OF  INTEREST          .        .        .  117 

"  Differences  in  Want  and  Provision  for  Want "  .  117 
"  Underestimation  of  Future  Pleasures  and  Pains  "  123 
"  Technical  Superiority  of  Present  Goods  "  .  .124 

"Productivity" 146 

"Abstinence" 149 

Productivity  and  Waiting     .         .         .         .  157 

"Exploitation" 159 

"  The  Fallacy  of  Saving  "      .         .         .         .         .176 

"Fructification" '      .         .178 

The  "  Sacrifice  Capital  istique  "  .  .  .  -194 
The  Monopoly  Theory  .....  203 

VIII.  INTEREST  IN  RELATION  TO  WAGES  AND  RENT         .     218 

INDEX 225 


A  THEORY  OF  INTEREST 

CHAPTER  I 

THE  PROBLEM 

§  i.  The  facts  of  interest  have  presented  a  theoretical 
and  a  moral  problem  from  time  immemorial.  Lending 
at  interest  was  condemned  by  the  Mosaic  law  1  as  be- 
tween Israelites ;  it  was  declared  by  Aristotle  2  to  be 
unnatural,  was  forbidden  by  the  Roman  Church  until 
modern  times,  and  is  denounced  by  most  Socialists 
today ;  yet  it  persists  age  after  age,  and  its  justification 
seems  to  most  business  men  too  obvious  for  discussion. 
If  we  turn  from  moralists  and  business  men  to  professed 
economists,  we  find  that  although  most  of  them  justify 
interest,  they  are  well-nigh  hopelessly  disagreed  as  to 
the  theory  of  its  justification.  The  most  notable  recent 
books  on  the  subject,  indeed,  such  as  those  of  Cassel,3 

1  E.g.  Deut.  xxiii.  19,  20:  "Thou   shalt  not  lend  upon  usury  to  thy 
brother  .  .  .  unto  a  stranger  thou  mayest  lend  upon  usury.  ..." 

2  Jowett's  translation,  as  quoted  in  Macfarlane's  Value  attd  Distribu- 
tion, p.  140:    "The  most  hated  sort  [of  money-making],  and  with  the 
greatest  reason,  is  usury,  which  makes  a  gain  of  money  itself,  and  not 
from  the  natural  use  of  it.     For  money  was  intended  to  be  used  in  ex- 
change, but  not  to  increase  at  interest.     And  this  term  usury,  which 
means  the  birth  of  money  from  money,  is  applied  to  the  breeding  of 
money  because  the  offspring  resembles  the  parent.     Wherefore  of  all 
modes  of  making  money,  this  is  the  most  unnatural." 

3  G.  Cassel :   The  Nature  and  Necessity  of  Interest,  Macmillan  &  Co., 
London, 1903. 

B  I 


2  A  THEORY  OF  INTEREST 

Bohm-Bawerk,1  Landry,2  and  Fisher,3  offer  theories  so 
different  that  a  faint-hearted  inquirer  would  be  tempted* 
to  give  up  the  problem  in  despair. 

Confronted  by  such  a  variety  of  opinions,  we  should 
be  justified  in  assuming,  notwithstanding  the  views  of 
business  men  to  the  contrary,  that  the  facts  of  interest 
do  present  a  problem,  and  that  one  of  the  utmost  diffi- 
culty. Instead  of  making  this  assumption  forthwith, 
however,  let  us  analyze  the  facts  briefly  in  connection 
with  some  of  the  most  commonly  accepted  explanations 
of  them,  to  convince  ourselves  at  first  hand  of  the  diffi- 
culty of  the  problem  and  to  get  some  idea  of  its  nature. 

§  2.  The  facts  themselves  are  obvious  enough.  If 
you  have  $100  to  spare  under  any  normal  circumstances, 
you  can  get  at  least  $3  in  addition  to  the  original  hun- 
dred by  lending  it  for  a  year  under  conditions  that  elim- 
inate virtually  all  risk.  Furthermore,  if  you  do  not 
lend  the  $100,  but  invest  it  in  machinery,  you  can  nor- 
mally increase  the  value  of  your  product  for  the  year 
enough  to  cancel  the  cost  of  repairing  the  machinery  so 
that  it  is  as  good  as  new,  of  insuring  against  its  destruc- 
tion or  its  depreciation  in  value,  and  of  making  and  over- 
seeing the  investment,  and  to  leave  you  at  the  end  of 
the  year  a  net  surplus  of  at  least  $3. 

The  apparent  surplus  of  $3  that  you  get  in  the  first 
case  we  shall  call,  with  everybody  else,  loan  interest. 


1  E.  v.  Bohm-Bawerk:   Recent  Literature  on  Interest,  Macmillan  Co., 
N.Y.,  1903. 

2  Adolphe  Landry :  V  Inter  el  du  Capital,  Giard  et  Briere,  Paris,  1904. 

3  Irving  Fisher :    The  Nature  of  Capital  and  Income,  Macmillan  Co., 
N.Y.,  1906;  The  Rate  of  Interest.  Macmillan  Co.,  N.Y.,  1907. 


THE  PROBLEM  3 

The  apparent  surplus  of  the  same  amount  that  you  get 
in  the  second  case  we  shall  call,  for  reasons  that  will 
appear  later,  natural  interest.1 

§  3.  It  is  against  loan  interest  that  the  attacks  of 
moralists  have  been  mainly  directed.  The  reason  is  evi- 
dent :  in  the  case  of  loan  interest  the  fact  that  the  lender 
gets  something  of  value  that  costs  him  no  labor  is  per- 
fectly obvious;  whereas  in  the  case  of  natural  interest 
the  apparent  surplus  —  that  is,  the  something  of  value 
which  costs  the  recipient  no  labor  —  is  noticed  only  when 
the  several  items  that  go  to  make  up  the  cost,  excluding 
any  allowance  for  interest  on  the  capital  employed,  but 
including  outgo  for  repairs,  insurance,  and  oversight, 
are  carefully  added  up  and  compared  with  the  receipts 
from  the  sale  of  the  finished  product.  Recently,  how- 
ever, natural  interest  has  been  attacked  as  vigorously 
as  ever  loan  interest  has  been,  notably  by  Karl  Marx 
in  his  work  Das  Kapital,  in  which  it  is  called  "the 
average  rate  of  profit." 

§  4.  That  the  bulk  of  the  great  sums  constantly 
borrowed  by  business  men  nowadays  are  borrowed 
solely  to  secure  natural  interest,  so  that  loan  interest 
and  natural  interest  are  most  closely  connected  and  rise 
and  fall  together,  is  now  realized  by  nearly  everybody 
who  thinks  of  the  subject  at  all.  Intelligent  men  of 
affairs,  such  as  bankers  and  manufacturers,  look  upon 
loan  interest  as  simply  the  price  of  what  we  are  calling 
natural  interest.  A  loan  yields  interest,  they  say,  be- 
cause it  gives  the  borrower  the  opportunity  to  use,  for 
the  time  covered  by  the  loan,  machinery  or  other  things 

1  This  definition  is  modified  in  §  33. 


4  A  THEORY  OF  INTEREST 

useful  in  production  to  the  value  of  the  sum  lent.  Of 
course,  they  add,  some  borrowers  may  not  take  advan- 
tage of  this  opportunity;  but  that  should  make  no 
difference  in  its  price :  you  must  pay  as  much  for  a  loaf 
of  bread  you  throw  away  as  for  one  you  eat.  Loan 
interest,  they  conclude,  is  the  price  of  the  opportunity 
to  use  labor-saving  instruments  to  the  value  and  for  the 
time  covered  by  the  loan ;  and  it  is  just  as  fair  that  that 
opportunity  should  be  paid  for  at  its  market  price 
as  that  any  concrete  commodity  should  be. 

Now  this  is  true  enough  so  far  as  it  goes ;  indeed,  it 
does  not  differ,  practically,  from  the  conclusion  I  shall 
sustain ;  but  to  suppose,  as  many  men  of  affairs  do,  that 
it  leaves  no  problem  of  interest  unsolved,  seems  amus- 
ingly nai've  either  to  a  Marxian  Socialist  or  to  an  academic 
economist.  The  Marxian  Socialist  asks  how  it  is  possi- 
ble, unless  we  are  to  believe  in  perpetual  motion  in 
finance,  for  natural  interest  to  accrue  to  the  owners  of 
tools  of  production,  admittedly  without  labor  on  their 
part,  unless  it  is  produced  by  somebody  else's  labor. 
He  challenges  such  an  owner  to  produce  so  much  as  a 
single  pin  with  no  worker  to  guide  the  machine.  He 
scorns  the  notion  of  perpetual  motion  in  finance,  and  he 
knows  that  "surplus  value,"  as  he  calls  it,  is  produced 
by  poor  devils,  down  at  the  bottom  somewhere,  working. 
The  economist,  on  the  other  hand,  asks  how  we  are  to 
account  for  the  fact  that  opportunities  to  get  natural 
interest  remain  open  age  after  age;  and  why  natural 
interest,  which  seems  to  be  a  surplus  of  value  added  to 
the  value  of  the  product  without  extra  labor  but  solely 
by  the  "productivity"  of  additional  labor-saving  in- 


THE   PROBLEM  5 

struments,  is  not  reflected  back  upon  the  price  of  those 
instruments  when  they  are  bought?  If  those  instru- 
ments can  produce  such  surplus  value,  why  do  they  not 
have  it?  Why  can  they  be  bought,  generation  after 
generation,  for  prices  below  the  sum  of  the  values  of  their 
future  services  ? 

§  5.  These  questions  go  deep.  Whoever  fails  to  see 
their  significance  has  yet  to  understand  what  the  interest 
problem  really  is.  But  they  do  not  exhaust  the  diffi- 
culties which  the  explanation  of  the  man  of  affairs  fails 
to  meet.  What  is  to  be  said  of  the  income  that  accrues 
to  the  owner  of  a  "durable  consumption  good,"  such  as 
a  dwelling-house  or  a  pleasure  carriage,  net  above  all 
cost  of  repairs  and  oversight,  from  renting  it  to  others  ? 
If  that  apparent  surplus  is  not  also  interest,  what  is  it  ? 
And  if  it  is  interest,  is  it  a  mere  reflection  of  the  natural 
interest  arising  in  connection  with  labor-saving  instru- 
ments, or  does  it  arise  independently  ? 

A  little  thought  will  reveal  that  it  is  interest  and  that  it 
would  arise  even  if  there  were  no  such  things  as  tools  in 
the  world.  Whether  there  were  tools  or  not  a  stone 
dwelling  would  not  sell  for  a  price  equal  to  the  sum  of  all 
its  future  rents,  reckoned  net  above  the  cost  of  repairs 
and  so  forth,  to  the  end  of  time.  And  if  discounting  is 
applied  to  the  values  of  the  future  services  of  the  dwelling 
precisely  as  to  those  of  the  future  services  of  tools,  inter- 
est must  accrue  to  the  owner  of  the  dwelling,  as  its 
future  services  come  in,  just  as  to  the  owner  of  the  tool. 

§  6.  What,  after  all,  is  the  cause  of  interest  in  any 
case  but  the  discounting  of  future  services  to  begin  with  ? 
If  a  man  buys  the  future  net  rents  of  a  dwelling  or  of  a 


6  A  THEORY  OF  INTEREST 

pleasure  carriage  for  a  price  equal  to  all  those  future 
net  rents  discounted  at  5  %,  what  is  the  cause  of  the  5  % 
interest  on  that  price  which  he  will  receive  as  the  years 
go  by  but  merely  the  discounting  to  begin  with  ?  Or  if 
he  buys  a  factory  building  and  machines  for  a  price 
equal  to  the  values  of  all  their  future  services  discounted 
at  6  %,  what  is  the  cause  of  the  6  %  interest  on  that  price 
which  he  will  receive  on  selling  the  finished  product  as 
the  years  go  by 'but  merely  the  discounting  to  begin 
with? 

§  7.  All  these  questions  are  very  perplexing  to  per- 
sons who  suppose,  as  most  of  us  not  Marxians  do  suppose 
until  we  give  special  study  to  the  problem,  that  interest 
is  due  to  some  imagined  power  on  the  part  of  labor- 
saving  instruments  to  "produce"  surplus  value.  They 
even  suggest,  indeed,  that  so  far  from  interest's  being 
produced  by  any  such  power  on  the  part  of  labor-saving 
instruments,  this  supposed  power  is  rather  itself  caused 
by  interest,  so  to  speak;  for  they  suggest  that  this 
supposed  power  is  a  mere  illusion  due  to  the  discounting 
of  the  price  of  the  instruments  at  the  beginning :  and 
what  is  discount  but  interest  itself  in  another  aspect  ? 

At  this  point  another  question  presents  itself.  Can  it 
be  that  the  supply  of  labor-saving  instruments  and  the 
progress  of  invention  have  nothing  to  do  with  the  rate  of 
interest  ?  That  we  cannot  believe :  we  are  sure,  whether 
we  can  incorporate  it  in  a  consistent  theory  or  not,  that 
there  is  some  causal  connection  between  invention  and 
the  rate  of  interest  and  between  the  supply  of  labor- 
saving  instruments  and  that  rate.  We  must  admit  that 
neither  labor-saving  instruments  nor  their  undoubted 


THE  PROBLEM  7 

usefulness  can  "produce"  surplus  value,  but  we  cannot 
give  up  the  conviction  that  somehow  interest  is  causally 
bound  up  with  invention  and  the  supply  of  such  instru- 
ments. 

§  8.  Finally  —  and  this  might  serve  as  a  challenge 
to  all  theories  of  interest  hitherto  propounded  —  no  one 
has  quite  solved  the  interest  problem  who  has  not  fully 
explained  just  what  it  is  that  men  discount  when,  as  we 
say  carelessly,  they  discount  "future  goods"  or  "future 
services."  No  one  has  quite  solved  the  problem,  in  other 
words,  who  has  not  fully  explained  the  nature  of  what 
we  call  the  principal.  What  is  the  principal?  Two 
lots  of  goods  or  services,  one  of  an  earlier  time  and  the 
other  of  a  later  —  so  much  is  obvious.  It  is  obvious 
also  that  the  two  lots  are  conceived  to  be  in  some  sense 
equal.  But  in  what  sense  ?  Whole  books  are  written 
without  giving  an  answer  to  this  apparently  simple,  and 
certainly  fundamental,  question.  Some  of  the  leading 
economists  refer  to  the  two  lots  as  merely  "present 
goods"  and  "future  goods"  or  as  "earlier  goods"  and 
"later  goods,"  as  if  nothing  less  hopelessly  vague  were 
required.  We  must  insist,  however,  on  knowing,  and 
knowing  precisely,  in  what  sense  the  two  lots  are 
equal. 

Are  they,  perhaps,  equal  in  "kind  and  number,"  as 
Bohm-Bawerk *  implies  in  some  passages  ?  No ;  for 

1  Positive  Theory  of  Capital,  Macmillan  &  Co.,  London,  1891,  p. 
237:  "Present  goods  are,  as  a  rule,  worth  more  than  future  goods  of 
like  kind  and  number.  This  proposition  is  the  kernel  and  centre  of  the 
interest  theory  which  I  have  to  present."  P.  248:  .  .  .  "present  goods, 
as  a  rule,  have  a  higher  exchange  value  and  price  than  future  goods  of 
like  kind  and  number."  These  passages  are  in  Book  V.  In  Book  VI 


8  A  THEORY  OF  INTEREST 

if  I  borrowed  a  ton  of  ice  of  you  in  July,  agreeing  to 
repay  you  with  interest  at  6  %  per  annum  in  six  months, 
you  would  be  far  from  satisfied  if  I  repaid  you  in  January 
with  one  and  three-hundredths  tons  of  ice  of  the  same 
kind.  Such  an  example,  you  may  say,  involves  peculiar 
conditions.  Peculiar  in  degree,  perhaps,  but  certainly 
not  in  kind.  The  only  reason  why  you  would  not  be 
satisfied  with  the  one  and  three-hundredths  tons  of  ice 
in  January  is  that  a  given  amount  of  ice  has  —  in  tem- 
perate climates,  of  course,  and  under  usual  circumstances 

-  less  value  in  January  than  in  July ;  and  it  is  equally 
true,  though  in  less  striking  degree,  of  innumerable  other 
things,  that  the  value 1  of  any  amount  changes  with  the 
passing  of  time. 

Are  the  two  lots  of  goods  or  services  that  are  to  be 
considered  the  principal  equal  in  the  amount  of  pleasure 

—  or  reduction  of  pain  —  that  they  afford  any  particular 
person  or  group  of  persons?  To  adopt  this  view  in- 
volves the  belief  that  when  you  or  I  or  anybody  else 
spends,  instead  of  saving  and  investing  at  interest  till 
some  future  time,  the  dollar  he  barely  fails  to  save  —  the 
marginal  dollar  spent,  as  we  might  call  it  —  he  thereby 
necessarily  sacrifices  not  a  mere  surplus  of  goods  or 
services,  but  a  surplus  of  pleasure.  Can  you  believe  that  ? 
I  cannot.  I  have  analyzed  my  motives  critically,  and 

Bohm-Bawerk  writes:  "In  the  previous  book  I  tried  to  show,  and 
account  for,  the  natural  difference  that  exists  between  the  value  of 
present  and  the  value  of  future  goods.  I  have  now  to  show  that  this 
difference  of  value  is  the  source  and  origin  of  all  Interest  on  Capital." 
1  The  word  "  value"  I  define  in  §  14  below.  Here  I  use  it  in  its  most 
widely  accepted  significance,  the  significance  that  I  give  in  §  14  to 
"nominal  value." 


THE  PROBLEM  9 

I  do  not  find  that  I  am  usually  disposed  to  sacrifice  a 
greater  future  pleasure  for  a  less  present  pleasure ;  and 
I  find  among  my  acquaintances  others  who  believe  them- 
selves equally  free  from  improvidence.  We  all  discount 
"future  goods"  in  some  sense,  of  course;  for  example, 
we  all  frequently  give  up  $1.02  next  year  in  favor  of 
Si  this  year ;  but  that  is  not  to  be  identified  with  dis- 
counting future  pleasure  and  pain  unless  it  be  shown  that 
$1.02  of  next  year  means  more  pleasure  or  more  relief 
from  pain  than  $i  of  this  year.  Note  that  I  do  not  say 
that  nobody  discounts  future  pleasures  and  pains  con- 
stantly or  that  the  most  provident  of  us  discount  them 
never  :  I  say  only  that  many  people  do  not  discount  them 
usually,  and  that  therefore  it  is  hard  to  believe  that  the 
true  conception  of  the  principal  is  two  lots  of  goods  or 
services  on  which  are  dependent  equal  amounts  of  pleas- 
ure or  relief  from  pain  on  the  part  of  any  particular 
person  or  group  of  persons. 

Finally,  then,  are  the  two  lots  constituting  the  prin- 
cipal to  be  conceived  as  equal  in  value?  After  our 
examination  of  the  other  two  conceptions,  this  one 
seems  more  like  the  truth.  Yet  it  is  not  without  its 
difficulties.  It  is,  indeed,  contrary  to  a  principle  gen- 
erally accepted  as  fundamental  for  all  economic  think- 
ing and  expressed  as  a  definition  of  value  by  many 
writers,  including  J.  S.  Mill,1  Walker,1  Carver,1  and 

1  T.  N.  Carver:  The  Distribution  of  Wealth,  Macmillan  &  Co., 
N.Y.,  1904,  p.  2:  "In  Walker's  brief  but  excellent  phrase,  'Value  is 
power  in  exchange';  and  as  Mill  defines  it,  the  value  of  a  thing  is  'its 
general  power  of  exchanging;  the  command  which  its  possession  gives 
over  purchasable  commodities  in  general.'  Either  definition  expresses 
the  whole  meaning  of  the  word  value."  The  quotation  from  Walker 


10  A  THEORY  OF  INTEREST 

Davenport.1  I  mean  the  principle  that  "value  is  power 
in  exchange."  The  lot  of  today  and  the  lot  of  ten  years 
hence  that  would  constitute  the  principal  of  a  loan  for 
that  time  are  obviously  very  unequal  in  "  power  in  ex- 
change," for  the  latter  cannot  be  exchanged  for  the 
former  unless  a  good  deal  of  what  we  call  interest  is 
thrown  in  to  boot.  We  must  therefore  give  up  either 
the  idea  that  the  two  lots  of  goods  or  services  con- 
stituting the  principal  are  equal  in  value  or  the  prin- 
ciple that  value  is  always  power  in  exchange;  for  the 
two  are  flatly  inconsistent. 

§  9.  This  short  analysis  suffices,  perhaps,  to  show 
that  interest  does  present  a  difficult  problem  and  that 
the  problem  involves  a  fundamental  aspect  of  the  con- 
ception of  value  itself,  the  heart  of  all  economic  theory. 
Of  this  problem  I  shall  offer  now  what  seems  to  me  an 
essentially  correct,  though  doubtless  very  imperfectly 
developed,  solution. 

is  from  his  Political  Economy,  Part  I,  §  8 ;  that  from  Mill,  from  his  Prin- 
ciples of  Political  Economy,  Book  III,  Ch.  i,  §  2. 

1  H.  J.  Davenport :  Value  and  Distribution,  Univ.  of  Chicago  Press, 
1908,  p.  569.  Davenport  there  defines  value  as  "a  ratio  of  exchange 
between  two  goods,  quantitatively  specified." 


CHAPTER  II 

SOME   DEFINITIONS  AND   FUNDAMENTAL   CONCEPTIONS 

§  10.  The  object  of  all  economic  acts  is  increase  of 
pleasure  or  decrease  of  pain.  Its  opposite  is  decrease  of 
pleasure  or  increase  of  pain.  The  first  group  of  alterna- 
tives I  shall  call  in  this  book  simply  pleasure,  the  second 
group  simply  pain. 

Pleasure  is  dependent  primarily  on  nature,  but  it  is 
dependent  also  —  and  this  is  what  concerns  men  practi- 
cally, and  therefore  what  concerns  economics  — •  on 
human  efforts  and  on  an  interval  of  time 1  between  these 
efforts  and  the  enjoyment  of  the  pleasure  dependent 
upon  them. 

Up  to  a  certain  point  efforts  may  be  pleasant  in  them- 
selves. This  point  is  soon  reached,  however,  and  be- 
yond it  efforts  are  painful.  To  work  in  my  orchard 
half  an  hour  a  day  in  good  weather  and  when  my  inter- 
ests do  not  call  me  elsewhere  may  be  distinctly  pleasant ; 
but  to  work  in  it  nine  hours  a  day  every  working  day  of 
the  year,  or  even  every  day  when  it  urgently  needs 
attention,  is  certainly  somewhat  painful.  By  the 
words  pain  and  painful  here  I  mean  to  cover  not  only  the 
positive  pain  which  must  begin  and  increase  as  efforts 

1  This  point  about  an  "interval  of  time"  anticipates  part  of  my 
theory  which  I  cannot  conveniently  develop  in  the  present  chapter. 
The  point  will  be  duly  supported  in  Chapter  IV,  §  37. 


12  A  THEORY  OF  INTEREST 

are  continued  beyond  a  certain  point,  but  also  the  nega- 
tive pain,  as  we  might  call  it,  involved  in  the  cutting  down, 
by  such  continuance  of  efforts,  of  the  time  1  available  for 
positive  enjoyments. 

Efforts  painful  in  themselves  may  be  the  cause  of 
pleasure  later.  The  ninth  hour  of  the  day  in  my  orchard 
is  painful  in  itself,  yet  it  may  be  the  cause  of  increasing 
or  improving  my  crop  of  apples ;  and  the  extra  size  or 
number  or  quality  of  the  apples  may  give  me  pleasure 
when  I  come  to  eat  them  or  to  consume  what  they  bring 
me  in  exchange  at  the  market. 

At  what  point,  then,  will  men  naturally  discontinue 
their  efforts  ?  In  so  far  as  men  are  rational  they  will 
discontinue  their  efforts  where  their  total  pleasure  de- 
pendent on  continuing  ceases  to  be  greater  than  their 
total  pain  on  which  continuing  is  dependent. 

§  n.  Efforts  painful  in  themselves  on  which  pleasure 
depends  we  call  labor.  I  say  "efforts  painful  in  them- 
selves" because  we  must  exclude  efforts  exerted  in  sport 
or  play :  we  must  not  make  the  definition  too  broad. 
But,  on  the  other  hand,  we  must  not  make  it  too  narrow  : 
we  must  not  exclude  efforts  which,  though  pleasant  in 

1  This  bearing  of  time  for  enjoyment  on  pain  was  pointed  out  by 
H.  H.  Gossen  in  his  Entwickelung  der  Gesetze  des  Menschlichen  Verkehrs 
und  der  daraus  fliessenden  Regeln  fur  menschliches  Handeln,  Brunswick, 
1854.  It  is  covered  by  this  theorem  of  his :  "Given  the  option  of  sev- 
eral pleasures,  and  a  time  so  limited  as  not  to  suffice  for  enjoying  them 
all  to  the  point  of  extinction,  we  obtain  a  hedonic  maximum  by  enjoy- 
ing each  pleasure  in  such  measure  that  its  intensity  at  the  moment 
when  the  period  of  fruition  expires  is  equal  to  that  of  every  other  pleas- 
ure." This  note  is  based  on  p.  28  and  p.  32  of  M.  Pantaleoni's 
Pure  Economics,  translated  by  T.  B.  Bruce,  Macmillan  &  Co.,  London, 
1898. 


DEFINITIONS   AND    FUNDAMENTAL  CONCEPTIONS      13 

themselves  in  some  cases,  are  not  forthcoming  in  suffi- 
cient quantity  to  meet  the  demand  unless  they  are  paid 
for.  Examples  of  efforts  of  this  sort  are  those  of  the 
first  hours  of  the  day  in  the  case  of  many  a  professional 
man  who  enjoys  his  work.  Extending  our  definition  to 
include  such  efforts  as  these,  we  may  put  it  thus  :  efforts 
on  which  pleasure  depends  that  are  painful  in  themselves 
or  command  a  market  price  are  called  labor. 

§  12.  In  some  cases  the  pleasure  dependent  on  efforts 
or  on  the  interval  of  time  mentioned  in  §  10  results 
directly,  that  is,  without  the  intervention  of  any  inter- 
mediate product.  The  results  in  these  cases  are  called 
services.  In  other  cases  the  pleasure  results  indirectly, 
the  direct  or  immediate  result  being  a  good  or  commodity 
which  in  turn  furnishes  the  pleasure  itself.  As  an  ex- 
ample of  the  services  of  a  person  take  those  of  a  violinist 
as  he  plays  before  an  audience.  An  example  of  a  good  or 
commodity  is  the  violin  itself,  which  stands  between  the 
efforts  of  its  maker  and  the  pleasure  that  comes  to  the 
audience.  Besides  the  services  of  persons  we  have  also, 
of  course,  the  services  of  goods :  what  the  violin  does 
towards  making  the  music  is  its  services. 

§  13.  We  often  think  of  goods  or  services  as  being 
such,  that  is,  as  being  capable  of  affording  pleasure,  by 
virtue  solely  of  an  attribute  —  due  to  properties  physi- 
cal, chemical,  and  the  like  —  inherent  in  themselves. 
And  this  attribute  we  call  their  utility.  Further  analysis, 
however,  reveals  the  fact  that  pleasure  depends  quite  as 
much  on  the  person  pleased  —  on  whether  he  exists,  for 
example,  and  can  avail  himself  of  the  good  or  service,  and 
if  he  can,  on  his  capacity  for  enjoying  —  as  on  the  objec- 


14  A  THEORY  OF  INTEREST 

tive  nature  of  the  good  or  service  itself.  Utility,  indeed, 
loses  all  its  meaning  if  the  capacity  of  the  person  in 
question  for  being  pleased  under  the  particular  circum- 
stances in  question  is  left  out  of  the  case.  Yet  the  mo- 
ment we  give  this  capacity  a  precise  meaning,  in  respect 
to  the  person  as  well  as  to  the  good  or  service,  we  can  drop 
the  word  utility  altogether  in  favor  of  others *  that  have 
not  been  associated  so  long  with  a  vague,  nay,  an  errone- 
ous, notion.  I  propose,  therefore,  to  drop  the  word 
utility  altogether  from  general  use  in  this  book. 

The  cpnditions  of  a  pleasure  that  are  satisfied  by  what 
is  inherent  in  a  good  or  service,  in  short  by  the  good  or 
service  itself,  strictly  speaking,  may  be  called  the  objec- 
tive factor  of  pleasure;  those  satisfied  by  the  pleasure 
receiver,  the  person  pleased,  may  be  called  the  subjective 
factor  of  pleasure.  There  is  no  pleasure  within  the  scope 
of  economic  inquiry  that  does  not  result  from  the  co- 
operation of  both  these  factors. 

The  separation  of  these  two  factors  seems  to  me  a  most 
helpful  step  in  economic  analysis.  Without  it  the 
working  out  of  a  scientific  theory  of  interest  would  be, 
in  my  opinion,  a  well-nigh  hopeless  undertaking.  I 
presume  it  may  have  been  made  by  others  before  now ; 
but  if  so,  I  do  not  know  by  whom.  Possibly  I  am  the 
first  to  develop  and  apply  it. 

Let  me  emphasize  the  distinction  between  these  two 
factors  of  pleasure  by  some  simple  examples.  The 
pleasure  I  could  get  at  this  moment  from  a  good  peach 
would  be  greater  than  that  I  could  get  from  a  poor  one. 

1 1  mean  the  word  ophelimity,  proposed  by  Professor  Pareto,  and  the 
word  value,  properly  modified.  See  §§  25-28. 


DEFINITIONS  AND  FUNDAMENTAL  CONCEPTIONS      15 

The  difference  between  the  pleasures  in  this  case  is  due 
to  a  difference  in  the  objective  factors  involved,  the  two 
peaches.  On  the  other  hand  the  pleasure  I  could  get 
from  a  good  peach  at  this  moment  would  be  greater  than 
that  I  could  have  got  from  the  same  peach  last  week 
when  my  appetite  was  weaker.  The  difference  between 
the  pleasures  in  this  case  is  due  to  a  difference  in  the  sub- 
jective factors  involved,  the  two  persons  to  be  pleased, 
the  two  capacities  for  enjoyment.  Furthermore,  the 
pleasure  I  could  get  from  a  perfect  peach  might  be 
greater  or  less  than  that  some  other  person  could  get 
from  the  same  peach.  In  this  case  also  the  difference 
would  be  due  to  the  subjective  factors  involved. 

§  14.  We  are  now  ready  to  consider  what  value  is. 
The  value  of  anything  — •  good,  service,  or  anything 
else1 — is  the  amount  of  somebody's  pleasure  that  is 
dependent  on  it,  expressed  as  an  attribute  of  the  thing. 

It  is  therefore  determined  by  the  two  factors  of  pleas- 
ure just  denned,  and  those  factors  may  be  said  to  be 
factors  of  value  as  well  as  factors  of  pleasure.  The 
value  of  anything  depends,  then,  not  only  on  what  is 
inherent  in  it  but  also  on  somebody's  capacity  for  getting 
pleasure  from  it ;  and  this  last  depends  on  the  circum- 
stances under  which  it  is  available  to  a  person,  notably 
the  degree  to  which  he  is  already  supplied  with  other 
things  satisfying  the  same  sort  of  want. 

This  covers,  it  will  be  noticed,  only  the  general  con- 

*I  say  "anything  else"  here  not  carelessly  but  because  I  want  to 
include  something  that  has  value  yet  is  not  either  a  good  or,  in  the 
ordinary  sense  of  the  word,  a  service.  To  cover  "good,  service,  or 
anything  else"  I  use  sometimes  the  word  "thing,"  so  modified  that  its 
meaning  cannot  be  mistaken. 


1 6  A  THEORY  OF  INTEREST 

ception  of  value  :  it  does  not  distinguish  specific  kinds  of 
value .  The  specific  kinds  classify  themselves  readily,  ho  w- 
ever,  according  to  the  different  subjective  factors  involved. 

Thus  there  is  the  personal  value1  of  a  peach,  its  value  to 
some  particular  person.  This  is  determined  by  the 
attributes  inherent  in  the  peach,  or  by  the  peach  itself 
-  the  objective  factor  —  and  by  the  particular  person's 
capacity  under  the  circumstances  for  enjoying  it  —  the 
subjective  factor. 

There  is  also  the  market  value 2  of  a  peach.  This  is 
determined  by  the  same  objective  factor,  the  peach,  in 
cooperation  with  —  as  subjective  factor  —  the  capacity 
to  enjoy  the  peach,  relatively  to  all  other  goods  and 
services  of  the  market,  of  any  person  having  access  to 
the  market.  Why  "relatively  to  all  other  goods  and 
services  of  the  market"  ?  and  why  "of  any  person  having 
access  to  the  market"?  Because  market  value  is  a 
purely  relative  conception.  It  expresses  not  the  amount 
of  pleasure  of  a  particular  person  that  is  dependent  abso- 
lutely on  the  thing,  but  the  amount  of  pleasure,  of  any 
person  of  the  market,  dependent  on  the  thing  relatively 
to  that  dependent  on  anything  else  of  the  same  market. 
The  amount  dependent  absolutely  on  a  thing,  a  sack  of 
flour  for  instance,  varies  enormously  according  to  whether 
the  person  in  the  case  is  rich  or  poor ;  but  the  amount 
dependent  on  a  sack  of  flour  relatively  to  that  dependent 
on  a  pound  of  beef,  a  violin,  or  a  dancing-master's  ser- 
vices 3  —  of  any  specified  quality,  of  course  —  is  the  same 

1  This  is  the  "subjective  use  value"  of  many  writers. 

2 This  is  the  "  objective  exchange  value"  of  many  writers. 

3  This  assertion  is  made  on  the  assumption  that  at  least  a  little  of 


DEFINITIONS  AND   FUNDAMENTAL   CONCEPTIONS      17 

for  a  millionaire  as  for  a  day-laborer  having  access  to 
the  same  market ;  for  if  it  were  different  thus  relatively, 
in  other  words  if  the  value  of  a  sack  of  flour  relatively  to 
the  value  of  its  price,  say  $i  —  which  stands  for  a  cer- 
tain amount  also  of  beef,  violins,  and  dancing  lessons  of 
any  designated  quality  —  were  different  to  the  two  men, 
at  least  one  of  them  would  become  a  buyer  or  a  seller 
of  flour  and  a  seller  or  a  buyer  of  the  other  things  until 
he  made  relative  values  to  himself  correspond  with  those 
of  the  market,  as  indicated  by  market  prices,  and  there- 
fore with  those  to  the  other  man  of  the  two,  who  might 
similarly  have  eliminated,  by  buying  and  selling  in  the 
market,  any  temporary  discrepancy  between  relative 
values  to  himself  and  relative  values  to  the  market. 

Of  the  other  kinds  of  value  which  it  would  be  possible 
to  distinguish  —  according  to  the  ,varioi:s  kinds  of 
subjective  factor  involved  —  we  have  need  of  distinguish- 
ing only  one  more.  This  is  the  value  that  differs  from 
market  value  only  in  that  its  subjective  factor,  instead 
of  being  that  of  the  particular  persons  constituting  a 
market  at  a  specified  time,  is  that  of  whatever  persons 
may  constitute  it  at  two  or  more  different  times.  The 
need  of  this  conception  is  felt  when  we  want  to  compare 
the  personal  values  or  the  market  values  of  two  lots  of 
goods  or  services  of  different  times.  Suppose,  for  ex- 
ample, we  want  to  compare  the  value  to  me  of  potatoes 

every  one  of  the  goods  and  services  in  question  is  demanded  —  at  the 
market  price,  of  course  —  by  both  of  the  two  men  in  question.  For 
the  principles  applying  to  goods  or  services  no  single  unit  of  which  is 
demanded  by  some  of  the  persons  constituting  the  market,  see  P.  H. 
Wicksteed's  Common  Sense  of  Political  Economy,  Macmillan,  London, 
1910,  Chapter  VI. 
c 


1 8  A  THEORY  OF  INTEREST 

this  year  with  the  value  to  me  of  potatoes  next  year. 
The  comparison  is  no  sooner  mentioned  than  we  want  to 
make  the  lots  of  the  two  times  "equal  in  value,"  so 
that  "the  comparison  will  mean  something."  "Are  we 
to  suppose,"  we  ask,  "that  the  two  lots  are  equal  in 
value,  that  is,  that  each  is  a  dollar's  worth,  say,  and  that 
the  dollar  itself  remains  constant  between  the  times?" 
The  answer  being  in  the  affirmative,  we  proceed  con- 
tentedly to  make  the  comparison  until  brought  to  a 
halt  by  the  puzzling  consideration  that,  from  the  point 
of  view  of  the  persons  constituting  the  market  at  the 
earlier  time,  the  dollar's  worth  of  potatoes  of  the  later 
time  is  less  valuable  than  the  dollar's  worth  of  the  earlier 
time  by  just  what  is  called  discount.  Well,  then,  we 
must  give  up  calling  the  two  lots  equal  in  "market 
value,"  and  we  must  find  out  in  what  sort  of  value  they 
are  equal.  And  so  we  are  driven  to  notice  that  it  is  to 
the  market  of  the  time  at  hand  in  each  case  that  the  two 
lots  are  equal.  The  market  of  the  later  time  is  that  of 
the  "same  society,"  in  a  sense,  just  as  the  American 
nation  of  1900  is  the  "same  nation,"  in  a  sense,  in  1913, 
but  in  another  sense  it  is  not  the  same.  Old  folk  have 
died ;  babies  have  been  born ;  and  those  living  at  both 
times  have  changed  in  needs  and  in  resources.  The 
later  market  is  not  identical  with  the  earlier  one,  and 
to  assume  it  to  be  so  would  be  blameworthy  even  if  the 
discount  did  not  stare  us  in  the  face.  As  it  is,  with  the 
discount  before  us  to  measure  the  considerable  difference, 
in  value  to  any  particular  market,  between  two  lots  of 
goods  or  services  of  different  times  that  are  equal  in 
value  to  the  market  contemporary  with  each,  we  are 


DEFINITIONS  AND   FUNDAMENTAL   CONCEPTIONS      ig 

foolish  indeed  if  we  do  not  follow  out  to  the  end  the  dis- 
tinction between  value  to  the  particular  market  and  value 
to  the  changing  market,  as  I  will  call  it,  to  see  if  it  will 
not  help  solve  the  interest  problem.  This  I  propose  to 
do ;  and  hereafter  I  shall  call  this  value  to  the  changing 
market  nominal  value.  Nominal  value,  then,  as  I  shall 
use  the  term,  means  the  value  whose  objective  factor 
is  the  same  as  that  of  the  other  sorts  of  value  and  whose 
subjective  factor  is  that  of  the  market  of  the  time  of  the 
thing  valued,  not  that  of  the  market  of  the  time  of  some 
other  thing  whose  personal  or  market  value  is  under- 
going comparison  with  it. 

§  15.  We  come  now  to  the  conception  of  cost.  In 
general  the  cost  of  anything  —  good,  service,  or  any- 
thing else  —  is  the  amount  of  somebody's  pain  on  which 
it  depends,  expressed  as  an  attribute  of  the  thing.  It 
is  determined  by  two  factors  of  pain  corresponding  to 
the  two  factors  of  pleasure  already  explained  in  §  13. 
The  objective  factor  is  simply  the  thing  itself,  objectively 
considered.  This  factor  is  obvious  enough  from  the  fact 
that  under  any  given  circumstances  and  for  any  person  it 
normally  requires  more  pain  to  make  two  wheelbarrows 
than  to  make  one.  The  subjective  factor  of  cost  is  the 
susceptibility  of  the  person  in  question,  under  the  cir- 
cumstances, to  pain  in  the  thing's  production.  This 
factor  is  evident  from  a  comparison  of  the  pain  required  of 
a  novice  to  make  a  wheelbarrow  with  that  required  of  a 
skilful  mechanic  to  make  a  similar  one,  or  of  that  required 
of  the  mechanic  when  well  with  that  required  of  the  same 
man  when  ill. 

The  several  kinds  of  cost,  personal  cost,  market  cost, 


20  A  THEORY  OF  INTEREST 

and  nominal  cost,  correspond  exactly  to  personal  value, 
market  value,  and  nominal  value,  and  therefore  need 
not  be  explained  separately. 

§  1 6.  It  is  evident  that  according  to  these  definitions 
anything  may  be  the  objective  factor  both  of  a  value 
and  of  the  cost  with  which  that  value  is  causally  con- 
nected. The  value  to  Smith,  for  example,  of  ten  apples 
of  specified  size  and  quality  may  be  said  to  be  the 
arithmetical  product  of  the  objective  factor,  which  we 
may  call  10,  and  the  subjective  factor,  which  would  be  a 
number  corresponding  with  Smith's  capacity,  under  the 
circumstances,  to  enjoy  the  apples.  The  cost  to  Smith, 
on  the  other  hand,  of  the  ten  apples  would  be  the  •arith- 
metical product  of  the  same  objective  factor,  represented 
by  the  number  10,  and  the  subjective  factor,  which  would 
be  Smith's  susceptibility  to  pain,  under  the  circumstances, 
in  producing  or  otherwise  acquiring  the  apples.  The 
objective  factor  of  value  stands,  indeed,  between  a 
pleasure  on  the  one  hand  and  the  pain  on  which  it  de- 
pends on  the  other,  the  connecting  causal  link  between 
them.  If,  therefore,  we  represent  the  amount  of  pleas- 
ure dependent  on  a  thing  and  the  amount  of  pain  on 
which  it  depends,  in  other  words  the  thing's  value 
and  its  cost,  geometrically  instead  of  arithmetically, 
that  is,  by  areas  of  two  dimensions  instead  of  by 
products  of  two  factors,  we  may  let  a  single  line 
serve  for  both  the  thing's  objective  dimension  of 
value  and  its  objective  dimension  of  cost.  This  we 
shall  do  in  §  25. 

If,  in  the  case  of  the  ten  apples,  Smith's  subjective 
factor  of  value  is  3  and  his  subjective  factor  of  cost  is  2, 


DEFINITIONS   AND   FUNDAMENTAL  CONCEPTIONS      21 

we  may  represent  the  value  and  the  cost  of  the  apples 
to  him  geometrically  thus  :  — 


VALUE  -30 

OBJECTIVE  DIMENSION-  to 

A 

\-Su0jEcrivE  DIMENSION 

I          OF  VALU£,    3 
& 

COST-20 

"^SUBJECTIVE  DIMENSION 

^     OF  COST.    2 

But  it  will  be  remembered  that  pleasure,  in  terms  of  which 
value  is  measured,  and  pain,  in  terms  of  which  cost  is 
measured,  differ  only  as  going  up  the  musical  scale 
differs  from  going  down  it.  Therefore  there  is  no  objec- 
tion to  representing  a  thing's  cost  and  its  value  by  super- 
imposed areas  thus :  — 


OBJECTIVE  DIMEMSIOH-IO 

And  this  latter  method  is  the  one  we  shall  adopt,  because 
it  reveals  at  once  to  the  eye  any  difference  there  may  be 
between  the  value  of  a  thing  and  its  cost. 

The  causal  relations,  on  the  one  hand  between  a  thing 
and  the  amount  of  pain  on  which  it  is  dependent,  and 
on  the  other  hand  between  it  and  the  amount  of  pleasure 
dependent  upon  it,  can  also  be  easily  represented 
to  the  eye.  Let  10  P  be  the  amount  of  pain  on  which 
the  thing,  10  apples,  say,  is  dependent.  Then,  if  we 
let  the  direction  from  cause  to  effect  be  indicated  by 
arrows,  the  causal  relations  are  shown  by  the  diagram 
below.  At  the  point  where  a  rational  person  ceases  to 
produce  the  thing  (see  §  10)  the  amount  of  his  pleasure 


22  A  THEORY   OF   INTEREST 

dependent  on  another  unit  of  it  would  just  equal  the 
amount  of  his  pain  on  which  the  same  unit  would  depend. 
Assuming  the  ten  apples  in  question  to  be  just  this 
" marginal"  unit,  as  it  is  called,  the  amount  of  the 
pleasure,  p,  dependent  on  the  ten  apples  will  be  10,  and 
the  diagram  will  be  as  follows  :  - 


The  net  result,  in  terms  of  pleasure  and  pain  to  the  per- 
son in  question,  of  his  producing  those  ten  apples  at  the 
margin  and  then  consuming  them,  is  of  course  zero. 

This  equality  of  the  value  and  the  cost  of  a  thing  to  the 
producer  at  his  margin  may  also  be  expressed,  and  for 
many  purposes  more  conveniently,  by  an  algebraic 
equation.  Let  A  and  B  stand  respectively  for  the  ob- 
jective and  the  subjective  factor  of  cost  to  the  producer, 
and  A'  and  B'  respectively  for  the  objective  and  the 
subjective  factor  of  value  to  the  producer.  Then  at 
the  producer's  margin  we  have  the  equation, 

AB  =  A'B'. 

Since  A  is  the  same  as  A',  it  follows,  of  course,  that  B 
must  be  the  same  as  B'.  Nevertheless  we  will  let  all 
four  symbols  stand  in  the  equation,  to  show  that  all 
four  factors  are  involved. 

§  17.  If  two  lots  of  things  of  the  same  time  are  equal 
in  value  to  any  person,  the  fact  may  be  expressed  by  a 
similar  equation.  In  this  case  A  and  B  stand  respec- 


DEFINITIONS   AND   FUNDAMENTAL  CONCEPTIONS      23 

lively  for  the  objective  and  the  subjective  factor  of  one 
lot,  and  A'  and  B'  respectively  for  the  objective  and  the 
subjective  factor  of  the  other.  Then  again 

AB  =  A'B'. 

§  1 8.  Suppose  it  is  the  market  values  of  these  two 
contemporary  lots,  A  and  A',  that  we  want  to  compare. 
That  of  A  can  be  expressed  by  substituting  for  the  per- 
sonal subjective  factor,  B,  the  market's  subjective  factor, 
which  we  may  designate  B".  This  subjective  factor  of 
the  market  cannot  be  an  absolute  magnitude,  for  the 
reasons  explained  in  §  14 :  it  must  be  a  relative  magni- 
tude. Nevertheless  it  is  just  as  real  a  magnitude,  and  it 
may  be  treated  algebraically  just  as  B  may  be.  So  AB" 
stands  for  the  market  value  of  the  thing  A.  As  for  the 
other  thing,  A',  its  market  value  is  represented  similarly 
by  A'  B"',  the  symbol  B"'  standing  for  the  market's 
subjective  factor  in  respect  to  A'. 

Now  A  and  A'  had  the  same  value,  as  we  saw,  to  some 
person.  The  question  arises  whether  they  have  also 
the  same  market  value.  In  other  words  does  AB"  equal 
A'B'"?  The  answer  is,  normally,  yes.  Normally 
two  lots  equal  in  value  to  a  person  are  equal  in  value  to 
the  market  to  which  that  person  has  access.  The  rea- 
son is  not  far  to  seek,  and  has  already  been  mentioned 
in  §  14  :  when  two  lots  valued  equally  in  the  market  are 
temporarily  valued  unequally  by  a  person  having  access 
to  the  market,  he  becomes  a  buyer  of  the  lot  he  prefers, 
or  a  seller  of  the  other  lot,  or  both,  and  in  so  doing  tends 
to  make  lots  equal  in  value  to  himself  equal  in  value  to 
the  market  also.  As  all  other  persons  having  access 


24  A  THEORY   OF  INTEREST 

to  the  market  tend  to  do  likewise  under  such  circum- 
stances, there  can  be  no  equilibrium  except  when  things 
equal  in  value  to  the  market  are  equal  also  in  value  to  the 
persons  composing  the  market. 

The  word  "normally"  demands  explanation.  By 
normally  I  mean,  here  and  everywhere  in  this  book,  on 
the  hypothesis  that,  excepting  only  the  cause  implied 
in  the  fifth  paragraph  of  §  41  and  referred  to  in  §  68, 
no  imperfections  of  the  market  or  other  causes  prevent 
men's  acting  according  to  their  best  economic  interests.  The 
word  normal  I  use  in  a  corresponding  sense.  I  may  add 
that  for  the  formulation  of  the  foundation  of  my  theory 
of  interest  I  shall  assume  normal  conditions,  not  because 
they  are  the  conditions  of  actual  life,  for  that  they  are 
not,  but  because  they  furnish  the  best  basis  for  our 
thinking.  Of  the  divergencies  of  actual  conditions  from 
the  normal  I  shall  take  due  account  before  bringing  this 
outline  of  my  theory  to  a  close.1 

§  19.  Going  back  to  our  equations  of  personal  value 
and  market  value,  we  must  not  fail  to  note  that  although 
AB  equals  A'B',  and  AB"  equals  A'B'",  it  must  not  be 
inferred  that  A'B'  equals  A'B'".  Of  the  relation  be- 
tween A'B'  and  A'B'"  we  know,  indeed,  nothing;  for 
whereas  A'B'  is  an  absolute  amount  of  pleasure,  A'B'" 
is  a  relative  amount  of  pleasure.  The  personal  values  of 
different  things  correspond,  it  is  true,  to  their  market 
value;  but  that  is  all  we  know.  If  a  bushel  of  wheat 
stands  at  $i  in  the  market,  and  shoes  of  a  certain  sort  I 
use  at  $4,  I  regulate  my  consumption  of  wheat  and  shoes 
so  that  the  four  bushels  of  wheat  that  equal  one  pair  of 

1  See  Chapter  VI,  §  72  and  following  sections. 


DEFINITIONS   AND   FUNDAMENTAL   CONCEPTIONS      25 

shoes  in  market  value  equal  one  pair  to  me  also ;  and 
in  so  doing  I  affect  the  market  value  of  both  wheat  and 
shoes  infmitesimally  myself.  But  to  compare  the  abso- 
lute value  to  me  of  a  pair  of  shoes  with  their  market 
value  (represented  by  the  price  $4) ,  which  is  not  an  abso- 
lute value  at  all  but  a  relation  between  absolute  values, 
is  meaningless. 

§  20.  I  cannot  forbear  to  digress  a  moment  to  em- 
phasize the  fact,  doubtless  obvious  enough  to  many  of 
my  readers,  that  some  of  the  great  social  reforms  of  this 
century  must  take  their  departure  from  the  principle 
summarized  in  the  last  paragraph.  At  present  there  is 
nothing  to  prevent  the  indefinite  production  of  goods  and 
services  which  the  market,  indeed,  demands,  but  whose 
cost  to  their  producers  is  incomparably  greater,  absolutely, 
than  their  value  to  their  consumers;  and  on  the  other 
hand  there  is  nothing  to  insure  the  production  of  goods 
and  services  which,  though  not,  indeed,  demanded  by 
the  market,  would  have  a  value  to  their  consumers  far 
greater  than  their  cost  to  their  producers.  This  is  only 
another  way,  of  course,  of  saying  that  the  aggregate 
happiness  is  greatly  reduced  by  uneconomical  distribu- 
tion. That  distribution  is  economical,  so  far  as  the 
principle  we  are  now  considering  is  concerned,  which 
unites  each  objective  factor  of  pleasure,  each  concrete 
good  or  service  or  other  valuable  thing,  with  the  greatest 
possible  subjective  factor  or  capacity  for  enjoyment.  I 
need  hardly  add  that  I  do  not  mean  to  suggest  here  any 
specific  reform :  I  mean  only  to  emphasize  in  its  eco- 
nomic aspect  a  principle  that  confronts  workers  for  the 
social  welfare  at  every  turn. 


26  A  THEORY  OF  INTEREST 

§  21.  To  return  to  our  definitions  and  fundamental 
conceptions,  the  reader  has  been  struck,  no  doubt,  by  my 
frequent  use  of  the  words  "depend"  and  "dependent," 
my  scant  use  of  the  words  "margin"  and  "marginal," 
and  my  definition  of  value  without  recourse  to  the  phrase 
"marginal  utility"  at  all.  Such  abandonment  of  ac- 
cepted terminology  demands  explanation. 

If  I  have  a  barrel  of  apples  and  lose  two  apples,  my 
pleasure  is  reduced  more  than  if  I  lost  but  one.  Another 
way  of  saying  this  is  that  the  amount  of  my  pleasure 
dependent  on  the  two  apples  is  greater  than  that  depend- 
ent on  one.  Moreover  my  pleasure  is  reduced  more 
by  losing  an  apple  when  I  have  only  half  a  barrel  than 
by  losing  it  when  I  have  a  whole  barrel.  Another  way 
of  saying  this  is  that  the  amount  of  my  pleasure  depend- 
ent on  an  apple  in  the  one  case  is  greater  than  that  de- 
pendent on  it  in  the  other.  It  is  clear  from  these  exam- 
ples that  the  phrase  "dependent  on"  covers  fully  the 
subjective  as  well  as  the  objective  factor  of  any  pleasure 
or  any  pain,  and  therefore  that  it  may  be  used  to  cover 
both  factors  when  we  want  to  define  value  and  cost. 
Thus  the  phrase  "marginal  utility"  b.ecomes  unneces- 
sary for  the  definition  of  value.  And  that  is  most  for- 
tunate, for  the  word  utility  is  so  associated  in  men's 
minds  with  the  delusion,  explained  in  §  13,  that  the 
amount  of  pleasure  dependent  on  a  thing  is  determined 
solely  by  attributes  inherent  in  the  thing  itself,  as  to  be 
well-nigh  ruined  for  scientific  usage.  The  very  expres- 
sion "marginal  utility"  implies  that  there  is  such  a  thing 
as  a  non-marginal  utility  that  is  distinct  from  value, 
whereas  in  fact  there  is  no  such  thing:  non-marginal 


DEFINITIONS   AND    FUNDAMENTAL   CONCEPTIONS      27 

utility  means  nothing  unless  the  subjective  factor  be 
specified;  and  when  the  subjective  factor  is  specified, 
the  so-called  non-marginal  utility  becomes  simply  a 
non-normal  value.  This  unfortunate  implication  of 
" marginal  utility"  rises  up  to  trouble  us  when  we  come 
to  drawing  the  two  curves  1  required  to  illustrate  graphi- 
cally the  theory  of  normal  prices.  It  leads  to  the  des- 
ignation of  the  two  curves  as  that  of  cost  and  that  of 
utility.  The  theory  of  normal  prices  is  greatly  clarified, 
however,  especially  the  theory  of  that  normal  price 
which  we  shall  find  interest  to  be,  by  designating  the  two 
curves  as  that  of  cost  and  that  of  value.  This  will  all  be 
made  more  clear  in  §  25,  where  the  diagram  of  normal 
prices  is  drawn  and  explained. 

To  show  that  my  conception  of  dependence  covers 
fully  the  conception  usually  covered  by  utility  terminol- 
ogy, I  venture  to  quote  at  length  a  classic  passage  from 
Bohm-Bawerk's  Positive  Theory  of  Capital.2  The  italics 
in  the  passage  are  Bohm-Bawerk's.  The  words  "de- 
pend" and  "dependent"  I  have  had  printed  in 
capitals. 

§  22.  "Turning  now  to  the  second  question  suggested 
in  last  chapter  we  ask,  Of  several  or  many  wants  which 
one  is  it  that  actually  DEPENDS  on  a  particular  good  ? 

"This  question  would  not  be  put  at  all  if  the  circum- 
stances of  economic  life  were  so  simple  that  single  wants 
always  stood  over  against  single  goods.  If  a  good  were 
adapted  to  satisfy  a  single  concrete  want,  and  if  it  were 

1  See  §  25. 

2  Macmillan   &   Co.,   London,    1891.     Book   III,   Chapter   IV,   pp. 
146-149. 


28  A  THEORY  OF  INTEREST 

at  the  same  time  the  only  one  of  its  kind,  or,  at  least,  the 
only  one  of  its  kind  available,  it  would  be  quite  clear 
without  further  consideration  that  the  satisfaction  of  the 
single  want  DEPENDED  on  our  command  over  the  sin- 
gle good.  But  in  practical  life  the  matter  is  scarcely  ever 
so  simple  as  this ;  on  the  contrary,  it  is  usually  compli- 
cated simultaneously  from  two  sides.  First,  one  and  the 
same  good  is  usually  adapted  to  satisfy  various  concrete 
wants,  which  wants  again  possess  various  degrees  of 
importance ;  and,  second,  several  goods  of  one  and  the 
same  kind  are  frequently  available,  thus  leaving  it  to 
caprice  which  good  will  be  used  for  the  satisfaction  of  an 
important,  and  which  for  an  unimportant  want. ...  I  have 
been  shooting  for  a  few  days  on  the  mountains,  and  by 
some  accident  I  miss  my  companions.  I  am  far  from  any 
house  or  village,  and  the  only  food  I  have  for  myself  and 
my  dog  is  two  entirely  similar  baker's  rolls.  It  is  clear 
that  the  satisfaction  of  my  hunger  is  of  infinitely  more 
importance  to  me  than  the  satisfaction  of  the  dog's 
hunger  and  it  is  just  as  clear  that  it  lies  with  me  which  of 
the  two  rolls  I  shall  consume  and  which  I  shall  give  to  the 
dog.  And  now  the  question  arises,  Which  of  the  two 
wants  here  is  DEPENDENT  on  the  bread  ? 

"One  is  tempted  to  answer,  That  want  to  which  the 
bread  was  actually  devoted.  But  it  is  evident  at  once 
that  this  is  an  erroneous  conclusion.  It  would  amount 
to  saying  that  the  two  rolls,  devoted  as  they  are  to  the 
satisfaction  of  wants  of  different  importance,  must 
possess  different  values;  while  it  does  not  admit  of 
question  that  two  similar  goods,  available  under  similar 
conditions,  must  be  entirely  equal  in  value. 


DEFINITIONS   AND   FUNDAMENTAL   CONCEPTIONS      29 

"Here,  again,  an  easy  casuistical  consideration  gives 
the  proper  solution.  The  problem  is,  Which,  among 
several  wants,  is  DEPENDENT  on  a  commodity  ?  This 
resolves  itself  very  simply  when  it  is  known  which  want 
it  is  that  would  fail  of  its  satisfaction  if  that  commodity 
were  not  present :  that  want  is  evidently  the  DEPENDENT 
one.  And  now  it  is  easy  to  show  that  the  want  which 
failed  of  its  satisfaction  would  not  be  that  want  which 
the  particular  commodity  was,  accidentally  and  capri- 
ciously, selected  to  satisfy,  but  would  always  be  the  least 
important  among  all  the  wants  in  question ;  that  is  to 
say,  among  all  those  wants  which  would  formerly  have 
been  provided  for  out  of  the  total  stock  of  this  class  of 
goods. 

"Consideration  for  one's  own  convenience,  as  obvious 
as  it  is  imperative,  induces  every  reasonable  man  who 
acts  economically  to  maintain  a  certain  fixed  order  in  the 
satisfaction  of  his  wants.  No  one  would  be  so  foolish 
as  to  exhaust  the  resources  at  his  command  in  satisfying 
trifling  wants,  or  wants  that  could  be  easily  ignored, 
and  to  deprive  himself  of  the  means  of  satisfying  neces- 
sary wants.  On  the  contrary,  every  one  would  take 
care  to  use  the  resources  at  his  command,  in  the  first 
instance,  to  provide  for  his  most  important  wants ;  then 
for  wants  that  come  after  these  in  importance;  then 
for  those  of  the  third  rank ;  and  so  on,  —  always  arrang- 
ing in  such  a  way  that  the  lesser  wants  were  only  pro- 
vided for  when  all  the  higher  wants  had  been  supplied, 
and  there  still  remained  some  means  of  satisfaction  to 
spare.  We  act  according  to  the  same  obvious  and  rea- 
sonable principles  when  our  stock  undergoes  a  change 


30  A  THEORY  OF  INTEREST 

by  the  loss  of  one  member  of  that  stock.  Naturally  this 
will  alter  the  plan  according  to  which  we  have  been  em- 
ploying our  resources.  Not  all  the  wants  we  had  ar- 
ranged to  satisfy  can  now  be  provided  for,  and  some 
abatement  in  the  totality  of  satisfaction  is  unavoidable. 
But,  of  course,  the  wise  man  will  try  to  lay  the  burden 
on  the  least  sensitive  spot;  that  is  to  say,  if  the  loss 
chances  to  be  in  a  commodity  which  was  destined  to  a 
more  important  use,  he  will  not  give  up  the  satisfaction 
of  this  more  important  want,  and,  by  holding  on  obsti- 
nately to  his  old  plan,  provide  satisfaction  for  the  less 
important  wants.  We  may  be  sure  that  he  will  satisfy 
the  more  important  want,  and  will  do  so  by  withdrawing 
provision  from  that  want,  among  all  the  wants  hitherto 
marked  out  for  provision,  on  the  satisfaction  of  which 
least  DEPENDS.  To  put  it  in  terms  of  our  former  illustra- 
tion :  if  our  sportsman  loses  the  roll  which  he  has  meant 
for  himself,  he  will  scarcely  feed  his  dog  with  the  one 
that  remains  and  expose  himself  to  the  danger  of  starving. 
He  will  suddenly  change  his  plan,  elevate  the  roll  that 
remains  into  fulfilling  its  more  important  function  only, 
and  shift  the  loss  to  the  least  important  function,  the 
feeding  of  the  dog. 

"The  case,  then,  stands  as  follows.  Wants  which 
are  more  important  than  this  'last'  want  will  not  be 
affected  -by  the  loss  of  the  good,  for  their  satisfaction  is, 
as  before,  guaranteed  in  case  of  need  by  the  replacement 
of  substitutes.  Nor  will  those  wants  be  affected  which 
are  less  important  than  this  'marginal  want,'  for  they 
go  unsatisfied  whether  the  good  is  there  or  not.  The 
only  want  affected  is  the  last  of  those  that  otherwise 


DEFINITIONS  AND   FUNDAMENTAL   CONCEPTIONS  31 

would  be  satisfied  :  it  will  be  satisfied  if  the  good  is  there ; 
it  will  not  be  satisfied  if  the  good  is  not  there.  It  is  thus 
the  DEPENDENT  want  we  are  seeking. 

"Here  then  we  have  reached  the  goal  of  the  present 
inquiry,  and  may  formulate  it  thus  :  the  value  of  a  good 
is  measured  by  the  importance  of  that  concrete  want,  or , 
partial  want,  which  is  least  urgent  among  the  wants  that 
are  met  from  the  available  stock  of  similar  goods.  What 
determines  the  value  of  a  good,  then,  is  not  its  greatest 
utility,  not  its  average  utility,  but  the  least  utility  which 
it,  or  one  like  it,  might  be  reasonably  employed  in  pro- 
viding under  the  concrete  economical  conditions.  To 
save  ourselves  the  repetition  of  this  circumstantial  de- 
scription —  which,  all  the  same,  had  to  be  somewhat  cir- 
cumstantial to  be  quite  correct  —  we  shall  follow  Wieser 
in  calling  this  least  utility  —  the  utility  that  stands  on 
the  margin  of  the  economically  permissible  —  the  eco- 
nomic Marginal  Utility  of  the  good.  The  law  which  gov- 
erns amount  of  value,  then,  may  be  put  in  the  following 
very  simple  formula  :  The  value  of  a  good  is  determined 
by  the  amount  of  its  Marginal  Utility. 

"This  proposition  is  the  keystone  of  our  theory  of 
value.  But  it  is  more.  In  my  opinion  it  is  the  master- 
key  to  the  action  of  practical  economic  men  with 
regard  to  goods.  In  the  simplest  cases,  as  in  all  the 
tangle  and  complication  which  our  present  varied  eco- 
nomic life  has  created,  we  find  men  valuing  the  goods  with 
which  they  have  to  deal  by  the  marginal  utility  of  these 
goods,  and  dealing  with  them  according  to  the  result  of 
this  valuation.  And  to  this  extent  the  doctrine  of  mar- 
ginal utility  is  not  only  the  keystone  of  the  theory  of 


32  A  THEORY  OF  INTEREST 

value,  but,  as  affording  the  explanation  of  all  economical 
transactions,  it  is  the  keystone  of  all  economical  theory." 

§  23.  The  words  "depend"  and  " dependent,"  as  also 
such  words  as  "affect,"  "effect,"  "result"  (as  noun  or  as 
verb),  "product,"  "produce,"  and  "cause"  itself  (as 
noun  or  as  verb),  involve  the  conception  of  causation, 
and  it  is  worth  while  to  consider  briefly  what  that  con- 
ception, by  which  our  thought  binds  events  together 
according  to  their  simultaneity  and  succession  in  nature, 
should  really  be. 

What,  after  all,  do  we  mean  by  causation?  What 
caused,  for  instance,  the  death  of  Julius  Caesar?  "The 
wounds,"  you  may  answer,  "made  by  the  daggers  of  the 
assassins."  True ;  but  what  if  you  had  adduced,  in- 
stead, "his  own  ambition,"  "his  neglect  of  his  friends' 
warnings,"  "loss  of  blood,"  or  any  of  the  many  other 
conditions  preceding  his  death  without  which  he  would 
not  have  died  when  he  did.  Any  one  of  these  conditions 
was  as  truly  a  cause  of  his  death,  in  a  sense,  as  the 
wounds.  And  we  might  extend  the  list  indefinitely : 
if  steel  had  not  continued  to  cut  flesh,  for  example, 
Caesar  might  not  have  died  from  the  blows  of  the 
assassins.  In  a  sense,  then,  the  very  properties  of  steel 
were  a  cause  of  his  death  !  Enlarging  the  conception 
thus,  we  finally  have  to  say  that  the  cause  of  any  event 
is  the  condition  and  properties  of  the  whole  universe  the 
instant  before  it.  But  the  condition  and  properties  of  the 
universe  an  instant  before  the  event  in  question  were 
themselves  caused  by  the  condition  and  properties  of  the 
universe  an  instant  before  that.  And  so  on  ad  infini- 
tum!  Now,  philosophically,  this  broadest  conception 


DEFINITIONS   AND   FUNDAMENTAL   CONCEPTIONS       33 

of  cause  has  to  be  taken  account  of;  but  for  practical 
purposes  it  is  useless :  for  practical  purposes  it  must  be 
narrowed  until  it  includes,  of  all  the  prerequisite  condi- 
tions, only  those  that  have  practical  significance,  that  is, 
those  that  men  can  affect  in  their  efforts  to  increase  their 
pleasure.  In  this  restricted  meaning  of  the  word  cause, 
the  cause  of  a  man's  death  is  the  sum  of  those  conditions 
preceding  it  that  the  man  or  somebody  interested  in 
him  might  conceivably  have  changed.  It  is  this  narrower 
conception  of  cause  that  we  must  adopt  for  the  present 
inquiry.  When  we  say  that  Smith's  receiving  a  certain 
amount  of  pleasure  "depends  on  ten  apples,"  we  do  not 
mean  to  deny  that  the  continuance  in  operation  of  cer- 
tain chemical  and  physiological  laws  concerned  in  the 
matter  are  necessary  also  to  his  receiving  the  pleasure : 
we  mean  to  point  out  the  apples  as  the  one  prerequisite 
condition  of  that  pleasure  which  a  practical  creature  like  a 
man,  that  is,  a  creature  who  undertakes  to  affect  condi- 
tions for  his  own  ends,  would  do  well  to  attend  to. 
And  likewise  when  we  say  that  the  ten  apples  "are  de- 
pendent on,"  "are  produced  by,"  "are  due  to,"  "are  the 
effect  of,"  "result  from,"  "are  the  product  of,"  or  "are 
caused  by"  a  certain  amount  of  somebody's  pain,  we 
mean  to  designate  that  pain,  not  as  in  any  absolute  sense 
the  only  prerequisite  condition  of  the  existence  and  avail- 
ability of  the  apples,  but  as  the  prerequisite  condition 
that  has 'practical  significance.  If  we  can  discover  all 
the  practically  significant  prerequisite  conditions  of  a 
rate  of  interest,  we  may  say  that  we  have  discovered  all 
the  causes  of  that  rate,  in  the  only  sense  of  the  word 
causes  that  can  reasonably  be  used  in  economics. 

D 


CHAPTER  III 
THEORY  OF  NORMAL  PRICES 

§  24.  By  the  price  of  a  valuable  thing  we  mean  the 
quantity  of  some  other  valuable  thing  for  which  it  will 
exchange.  Normally,  in  the  sense  of  that  word  denned 
in  §  1 8,  the  price  of  a  thing  would  conform  exactly  to  its 
market  value  (see  §  14)  when  that  market  value  itself 
was  normal.  A  price  conceived  as  conforming  thus  to 
the  thing's  normal  market  value  is  called  a  normal  price. 

Though  normal  conditions  may  never  hold  in  actual 
life,  so  that  normal  values  and  normal  prices  differ  from 
any  values  and  prices  of  the  real  world,  the  theory  of 
normal  prices  is  nevertheless  most  important  for  our 
purpose ;  for  the  thing  whose  price  is  interest  is  a  thing 
whose  market,  though  not  perfect,  is  at  least  exception- 
ally well  organized,  and  whose  price  is  more  like  a  normal 
price  than  most  prices  are.  Besides,  any  price,  even 
one  that  diverges  far  from  the  normal,  can  best  be  under- 
stood by  first  understanding  the  norm  from  which  it 
diverges  and  then  the  causes  of  its  divergence.  I  propose, 
therefore,  to  proceed  now  with  the  theory  of  normal 
prices  in  general. 

We  may  start  from  the  point  of  view  of  the  individual. 
To  him  the  production  of  each  unit  of  the  thing  beyond  a 
certain  point  must  involve  cost.  This  is  inevitable  with 
the  definitions  of  cost  and  of  pain  given  above  in  §  15 

34 


THEORY   OF  NORMAL  PRICES  35 

and  §  10  respectively.  Beyond  a  certain  point,  too,  the 
cost  of  successive  units  —  our  definitions  of  cost  and  of 
pain  still  holding  — •  must  rise ;  and  after  it  has  begun 
to  rise,  it  must  continue  to  rise  indefinitely.  This  will  be 
found  to  be  true  even  in  the  case  of  a  producer  excep- 
tionally fond  of  his  work,  such  as  a  great  pianist :  even 
in  his  case  the  point  must  somewhere  be  reached  —  if 
not  after  the  fifth  or  sixth  hour  of  playing  per  day,  as 
would  seem  likely,  certainly  before  the  twenty-fourth 
—  where  more  playing  becomes  in  itself  painful,  and 
from  which  point  on  each  successive  hour's  playing  must 
be  more  painful  than  the  last. 

As  for  the  value  of  the  successive  units  of  the  thing  in 
question,  it  must  certainly  decrease ;  and  eventually,  if 
production  is  continued  indefinitely,  the  value  of  another 
unit  must  fall  quite  to  zero.  If  the  producer  were  the 
great  pianist,  for  instance,  the  money  coming  in  to  him 
from  the  seventh  hour  of  playing  daily  would  be  applica- 
ble only  to  the  purchase  of  luxuries  little  cared  for, 
whereas  that  coming  in  from  the  first  hour  daily  would 
be  applicable  to  the  purchase  of  necessaries  and  of  luxu- 
ries really  cherished.  Increase  the  income  thus  indefinitely 
and  the  value  of  each  unit  would  fall  indefinitely  until  it 
reached  zero. 

§  25.  The  last  two  paragraphs  justify  us  in  repre- 
senting the  cost  of  the  successive  units  of  any  valuable 
thing  by  a  curve  that  soon  rises  above  the  base-line  and 
that  continues  to  rise  indefinitely;  they  justify  us  in 
representing  the  value  of  those  units,  on  the  supposition 
that  each  unit  were  marginal,  by  a  curve  that  falls  con- 
tinually and  that  would  fall  to  the  base-line  if  continued 


36  A  THEORY  OF  INTEREST 

indefinitely  ;  and  they  justify  us  also  in  making  these  two 
curves  intersect.  The  curves  are  shown  in  the  diagram 
below.  Along  LI  lay  off  successive  units  of  the  (ob- 
jective) thing  of  value  in  question,  in  other  words  suc- 
cessive units  of  the  objective  factor  of  the  thing's  value. 
Along  LK  lay  off  successive  units  both  of  the  subjective 
factor  of  its  value  and  of  that  of  its  cost.  Then,  if  the 
number  of  units  produced  by  the  individual  in  question 
is  measured  by  LD,  and  the  subjective  factor  of  the 
cost  to  him  of  the  last  of  these  units  is  measured  by  DJ, 


DIAGRAM  I 

the  cost  to  him  of  the  last  infinitesimal  unit  will  be  rep- 
resented by  the  area  of  a  parallelogram  whose  length  is 
DJ  and  whose  breadth  is  infinitesimal,  and  therefore 
equally  well  by  the  mere  length  of  DJ.  The  value,  on 
the  other  hand,  of  the  same  last  infinitesimal  unit  to 
the  producer  will  be  represented,  if  we  suppose  its 
subjective  factor  to  be  measured  by  DF,  by  a  paral- 
lelogram whose  length  is  DF  and  whose  breadth  is 
infinitesimal,  and  therefore  equally  well  by  the  mere 
length  of  DF. 

If  now  we  suppose  the  amount  of  the  thing  produced 
to  be  increased,  the  line  representing  the  subjective 
factor  of  cost  for  the  last  or  marginal  unit  will  grow  longer 


THEORY  OF  NORMAL   PRICES  37 

and  that  representing  the  subjective  factor  of  value  for 
that  same  unit  will  grow  shorter.  A  curve  drawn 
through  /  and  the  limits  of  all  the  rest  of  these  cost  lines 
will  therefore  take  some  such  form  as  CH ;  and  a  curve 
drawn  through  F  and  the  limits  of  all  the  rest  of  these 
value  lines  will  take  some  such  form  as  OR.  Somewhere 
the  two  curves  will  intersect.  If  we  designate  the  point 
of  their  intersection  by  W,  then  WV  measures  both  the 
cost  and  the  value  to  the  producer  of  the  last  unit  pro- 
duced when  the  whole  number  of  units  is  represented  by 
LV.  Beyond  the  point  V  the  producer  will  not  normally 
go  on  producing,  because  the  value  to  him  of  an  additional 
unit  would  be  less  than  its  cost  to  him.  Short  of  the 
point  V,  on  the  other  hand,  he  will  not  normally  cease 
producing,  because  short  of  that  point  the  value  to  him 
of  each  additional  unit  is  greater  than  its  cost  to  him. 
Thus  normally  the  amount  of  his  production  will  be 
measured  by  LF,  and  normally  the  cost  to  him  and  the 
value  to  him  of  the  last  or  marginal  unit  will  each  be 
measured  by  WV. 

Furthermore,  the  value  of  any  unit  before  the  last  to 
the  producer  is  the  same  as  that  of  the  last.  This  follows 
from  what  is  called  the  principle  of  substitution,  which 
was  explained  clearly  in  the  passage  about  the  two  rolls 
quoted  from  Bohm-Bawerk  in  §  22.  Since  the  last  unit 
of  the  thing  could  at  once  be  substituted  for  any  unit 
before  the  last  that  might  be  put  to  a  more  important 
use,  that  is,  made  to  cooperate  with  a  higher  subjective 
factor  of  pleasure,  no  more  pleasure  could  be  dependent 
on  such  a  unit  before  the  last  than  on  the  last  one  itself. 
And  this  is  only  another  way  of  saying  that  no  unit  before 


38  A  THEORY  OF  INTEREST 

the  last  could  have  more  value  to  the  producer  than  the 
last  one. 

Does  the  same  principle  of  substitution  apply  to  costs 
also  ?  Does  it  operate  so  as  to  bring  the  cost  of  every 
unit  before  the  last  up  to  that  of  the  last  one?  Cer- 
tainly not.  Of  course  not,  for,  the  cost  of  each  unit 
being  less  and  less  as  we  recede  farther  and  farther  from 
the  last  one,  that  is,  as  we  recede  from  V  towards  L, 
and  cost  being  undesired  by  the  person  in  question,  that 
person  has  no  incentive  to  substitute  the  higher  cost  of 
the  last  unit  for  the  lower  cost  of  any  of  the  previous 
units. 

Instead  of  saying,  therefore,  that  under  normal  con- 
ditions WV  represents  both  the  cost  to  the  producer  and 
the  value  to  the  producer  of  the  last  or  marginal  unit 
of  the  thing,  we  must  say  that  under  those  conditions  it 
represents  the  cost  to  the  producer  of  the  last  unit  and 
the  value  to  him  of  any  unit  whatever. 

To  sum  up  in  words,  then,  the  meaning  of  our  dia- 
gram, we  may  say  that  the  value  *  to  a  person  of  any 
unit  of  any  thing  falls,  under  the  ideal  conditions  cov- 
ered by  the  word  normal,  to  equality  with  the  cost  to 
him  of  the  last,  which  is  also  the  most  costly,  unit  of 
his  supply. 

From  this  theory  of  normal  personal  value  to  that  of 
normal  market  value  and  normal  prices  the  transition  is 
short.  Under  normal  conditions,  as  was  explained  in 
§  14  (If 4)  and  §  18  (^[2),  market  values  must  correspond 
with  personal  values,  and  market  costs  with  personal 

1  For  a  modification  of  this  assertion  required  by  strict  accuracy, 
see  §  41  (If  5). 


THEORY  OF  NORMAL  PRICES  39 

costs.  As  this  holds  true  for  any  person  in  the  market, 
for  any  thing  in  the  market,  and  for  any  supply  of  a 
thing,  it  follows  that  our  diagram  illustrating  the  theory 
of  normal  personal  value  will  serve  also  for  that  of  normal 
market  value.  Only  in  the  interpretation  of  the  dia- 
gram must  there  be  a  change :  whereas  in  the  personal 
cost-value  diagram  distance  up  from  the  base-line  meas- 
ures absolutely  the  subjective  factor  of  cost  or  of  value, 
respecting  a  specified  increment  of  a  thing,  on  the  part 
of  a  particular  person,  in  the  market  cost-value  diagram 
that  dimension  measures  the  subjective  factor  of  cost 
or  of  value,  respecting  a  specified  increment  of  a  thing, 
on  the  part  of  any  person  whatever  and  relatively  to  that 
person's  subjective  factor  of  cost  or  of  value  in  respect 
to  any  other  thing  in  the  market.  Applied  to  market 
values  and  market  costs,  then,  the  diagram  means  that 
the  market  value  of  any  unit  of  any  thing  falls,  under  the 
ideal  conditions  covered  by  the  word  normal,  to  equality 
with  the  market  cost  of  the  last,  which  is  also  the  most 
costly,  unit  of  the  supply. 

Having  now  in  the  explanation  of  the  diagram  a  theory 
of  normal  market  value,  we  have  next  to  distinguish 
between  that  value  and  normal  price.  The  difference  is 
this :  normal  market  value  is  an  amount  of  pleasure  — 
"the  amount  of  pleasure  dependent  [normally]  .  .  . 
relatively,"  etc.,  as  explained  in  §  14  —  whereas  normal 
price  is  a  concrete  thing  —  any  thing  in  the  market  that 
under  normal  conditions  will  exchange  for  the  thing 
priced,  or  in  other  words  anything  in  the  market  having 
the  same  normal  market  value  as  the  thing  priced.  (I 
say  "any"  thing  in  the  market  because  it  cannot  be 


40  A  THEORY  OF  INTEREST 

denied,  for  instance,  that  a  bushel  of  potatoes  is  the  price 
of  a  circus  ticket  if  it  happens  to  exchange  for  a  circus 
ticket.  Usually,  of  course,  the  word  price  suggests  to 
us  money  price  only ;  but  it  must  be  recognized  that, 
strictly  speaking,  any  sort  of  valuable  thing  may  be  the 
price  of  any  other.)  The  normal  price  of  a  unit  of  any 
thing,  then,  always  corresponds  to  the  normal  market  value 
of  any  unit  of  the  thing  and  to  the  normal  market  cost 
of  the  last  and  most  costly  unit  of  it ;  and  the  line  of  our 
diagram  representing  this  value  and  this  cost,  namely 
WV,  may  be  said  to  represent  as  well  the  normal  price 
of  a  unit  of  the  thing. 

§  26.  If  we  were  asked  to  explain  the  causes  of  the 
normal  price  of  any  thing,  we  could  now  do  so.  Those 
causes  must  be  the  conditions  of  practical  significance 
without  which  the  price  would  not  be  what  it  is.  These 
conditions,  in  turn,  must  be  those  that  —  to  use  the  con- 
venient terms  of  the  diagram  —  made  the  line  WV  as 
long  as  it  is  and  no  longer.  That  means  that  they  can 
be  divided  into  two  groups,  those  on  the  cost  side,  which 
determined  the  course  of  CH  where  it  is  to  cross  OR,  and 
those  on  the  value  side,  which  determined  the  course  of 
OR  where  it  is  to  cross  CH.  This  classification  will  be 
found  very  useful  when  we  undertake  to  enumerate  the 
causes  of  the  price  called  interest. 

§  27.  When  we  come  to  consider,  in  connection  with 
the  causes,  on  the  demand  side,  of  any  normal  price,  the 
course  of  OR  at  points  other  than  W,  we  find  ourselves 
obliged  to  adopt  some  name  for  the  reality  represented 
by  the  height  above  the  base-line  of  OR  at  those  points. 
What,  for  example,  does  the  height  of  OR  at  F,  or  in 


THEORY  OF  NORMAL  PRICES  41 

other  words  the  length  of  the  line  DF,  represent  ?  This 
question  has  already  been  broached  in  §  13  and  §  21, 
but  it  requires  further  discussion.  Does  DF  represent 
utility,  as  many  writers1  would  have  it?  Certainly 
not  utility  in  the  abstract,  for  that  is  not  mensurable : 
if  utility  at  all,  certainly  utility  in  conjunction  with 
some  specified  subjective  factor  of  pleasure,  some  speci- 
fied capacity  to  use.  But,  then,  if  what  DF  represents 
is  a  utility  in  conjunction  with  some  specified  subjective 
factor  of  pleasure,  why  call  it  utility  at  all  ?  That  word 
has  been  spoiled  for  the  designation  of  a  mensurable 
attribute,  partly  by  its  everyday  use  in  the  sense  of 
utility  in  the  abstract.  Modified  by  the  word  "mar- 
ginal," it  has  come  in  economics,  it  is  true,  to  mean  that 
mensurable  quantity  of  pleasure,  dependent  on  the  thing 
in  question,  which  is  value.  Yet  how  unsuitable  it  is 
to  play  the  role  it  is  playing  in  the  term  "  marginal 
utility"  -  which  has  become  a  sort  of  new  corner-stone 
of  economic  theory  —  is  apparent  the  moment  we  drop 
the  "marginal"  and  try  to  apply  the  mere  word  utility 
that  is  left  to  things  in  the  real  world  that  differ  from 
"marginal  utility"  only  in  not  being  marginal.  Those 
things  are  to  "marginal  utility"  just  what  all  the  lines 
between  OR  and  LI,  and  parallel  to  WV,  are  to  WV 
itself :  in  other  words  they  are  represented  by  the  height 
above  LI  of  the  various  points  on  the  curve  OR,  being 
mensurable  things  which  the  unmodified  word  utility 
utterly  fails  to  denote. 

1  See,  for  example,  H.  R.  Seager's  Introduction  io  Economics,  Holt, 
N.Y.,  1906,  p.  86;  C.  W.  Macfarlane's  Value  and  Distribution,  Phila- 
delphia, 1900,  p.  55  ;  and  S.  N.  Patten's  Theory  of  Prosperity,  Macmillan, 
N.Y.,  1902,  pp.  22-25. 


42  A  THEORY  OF  INTEREST 

§  28.  Objecting  to  the  designation  of  the  "relation 
of  suitability  between  a  thing  and  a  man  by  the  word 
utility,  Professor  Vilfredo  Pareto  of  Lausanne  proposed 
to  substitute  a  word  coined  from  the  Greek  ox^eXi/io?, 
namely  ophelimity.  As  this  word  was  clearly  defined  by 
its  coiner  at  the  start  in  terms  of  the  user  as  well  as  of  the 
thing  used,  that  is,  in  terms  of  what  I  call  the  subjective 
as  well  as  in  those  of  what  I  call  the  objective  factor  of 
pleasure,  it  has  never  meant  anything  else  than  the 
definite  mensurable  thing  it  was  coined  to  mean. 
I  regard  it,  therefore,  as  far  preferable  to  the  word 
utility,  if  one  of  the  two  is  needed  for  the  theory 
of  value. 

But  why  is  either  word  needed  ?  Why  not  call  the 
things  represented  by  the  lines  between  OR  and  LI,  and 
parallel  to  WV,  simply  non-normal  values?  Surely  there 
is  an  advantage  in  calling  them  by  a  name  that  con- 
nects them  directly  with  amounts  of  pleasure,  as  the 
word  value,  defined  as  I  have  defined  it,  does.  Surely, 
too,  there  is  an  advantage  in  calling  them  by  a  name  that 
indicates  their  logical  relations  with  the  costs  represented 
in  the  diagram  by  the  perpendicular  lines  up  from  the 
same  points  on  LV  to  the  lower  curve  CH,  as  the  word 
value,  defined  as  I  have  defined  it,  does.  And  there  is 
nothing,  so  far  as  I  can  see,  to  prevent  the  use  of  the 
word  value  for  this  purpose :  what  DF  represents  is  a 
value  just  as  surely  as  what  DJ  represents  is  a  cost. 
The  former  is  not,  it  is  true,  a  normal  value,  under  the 
conditions  covered  by  the  diagram;  but  neither  is  the 
latter  a  normal  cost.  The  former  is  the  value  of  any 
unit  of  the  thing  in  question  when  the  supply  is  measured 


THEORY  OF  NORMAL  PRICES  43 

by  LD,  just  as  the  latter  is  the  cost  of  the  last  unit  of 
the  thing  in  question  when  the  supply  is  measured  by 
LD. 

§  29.  That  the  reader  may  have  the  case  in  favor  of 
the  use  of  the  word  ophelimity  fairly  presented  to  him, 
I  quote  the  following  passage  from  the  Precis  d'Econo- 
mie  Politique1  of  Professor  P.  Boninsegni,  a  disciple  of 
Pareto  and  his  associate  in  the  University  of  Lausanne. 
I  should  quote  from  Pareto's  own  Cours  d'Economie 
Politique2  if  the  passage  on  ophelimity  there  did  not 
occupy  many  pages. 

"L'utilite3  ou  la  valeur  d'usage  des  economistes  est 

1  Lausanne,  F.  Rouge,  1910,  pp.  2-4. 

2  Lausanne,  F.  Rouge,  1896,  Vol.  I. 

3  The  passage  may  be  translated  as  follows  : 

"  'Utility,'  or  'value  in  use,'  as  used  by  economists,  may  have  two 
different  meanings.  It  may  mean 

"  (a)  an  objective  attribute  that  things  might  have  as  being  useful 
to  men ; 

"  (j3)   a  relation  of  suitability  existing  between  a  thing  and  men. 

"Value  in  use  in  its  first  meaning  (a)  has  no  sense;  in  its  meaning 
(|3),  while  approaching  the  truth,  it  embraces  an  imperfect  idea  and  is 
ambiguous. 

"I.  It  is  imperfect:  (a)  because  the  utility  or  value  in  use  of  a 
thing  is  relative  to  the  individual  in  question  and  not  to  men  in  general ; 
(6)  because  it  fails  to  emphasize  the  fact  that  the  utility  or  value  in  use 
of  a  thing  depends  on  the  quantity  of  it  that  the  individual  in  question 
has  consumed  or  has  at  his  disposal. 

"II.  The  ambiguity  is  due  to  the  mass  of  different  ideas  and  feelings 
that  the  term  utility  gives  rise  to  on  account  of  the  different  acceptations 
it  has  acquired  in  ordinary  parlance  as  well  as  in  the  technical  vocabu- 
lary of  political  economy  and  the  other  sciences. 

"The  same  observations  may  be  repeated  in  respect  to  the  term 
scarcity. 

"To  avoid  all  these  ambiguities  M.  Pareto  introduced  into  the  science 
a  new  term.  He  gives  the  name  ophelimity  to  the  relation  of  suita- 


44  A  THEORY  OF  INTEREST 

susceptible  de  deux  significations  differentes.  Elle 
peut  exprimer  : 

"  (a)  une  propriete  objective  qu'auraient  les  choses 
d'etres  utiles  aux  hommes  ; 

"  (/3)  un  rapport  de  convenance  qui  existe  entre  une 
chose  et  les  hommes. 

"La  valeur  d  'usage  dans  sa  premiere  signification 
(a)  n'a  pas  de  sens  ;  dans  sa  signification  (/3)  ,  tout  en 
se  rapprochant  de  la  realite,  elle  renferme  une  idee 
imparfaite  et  donne  lieu  a  des  equivoques. 

"I.    Elle    est    imparfaite:      (a)    parce    que    Putilite 

bility  that  exists  between  a  particular  individual  and  the  quantity  of  a 
good  added  to  a  given  quantity  of  the  same  good  that  the  individual 
has  already  consumed  or  of  which  he  has  the  disposal. 

"The  ophelimity,  for  an  individual  X,  of  a  quantity  h  of  a  good, 
added  to  a  quantity  a  (a  being  possibly  equal  to  zero)  of  the  same  good 
that  the  individual  has  already  consumed  or  of  which  he  has  the  dis- 
posal, is  the  pleasure  which  the  quantity  h  gives  him. 

"Suppose  <i>  (a)  is  the  pleasure  which  is  given  to  X  by  the  consumption 
or  the  possession  of  the  quantity  a  of  the  good  in  question,  and  <i>  (a-\-h) 
the  pleasure  given  by  the  quantity  a  +  h  of  the  same  good.  Then  the 
ophelimity  of  the  quantity  h  is 


"Elementary  ophelimity  is  the  quotient  arising  from  dividing  by  h  the 
pleasure  due  to  the  enjoyment  of  the  quantity  h,  provided,  however, 
that  h  is  very  small  (infinitely  small)  : 

limit  MM  _$/(0). 

7,0        h 

"Elementary  ophelimity  per  unit  of  price  is  the  quotient  arising  from 
dividing  the  elementary  ophelimity  by  the  price. 

"If  we  indicate  by  p  the  price  of  the  good  of  which  the  elementary 
ophelimity  for  X  is  <£'  (a),  then 

i#f(«) 
P 

is  the  ophelimity  per  unit  of  price." 


THEORY  OF  NORMAL  PRICES  45 

ou  la  valeur  d'usage  d'une  chose  est  relative  a  un  homme 
determine  et  non  aux  hommes  en  general;  (b)  parce 
qu'on  ne  met  pas  en  relief  le  fait  que  1'utilite  ou  la 
valeur  d'usage  d'une  chose  depend  de  la  quantite  que 
Findividu  en  a  consommee  ou  dont  il  a  la  disposition. 

"II.  Les  equivoques  proviennent  de  la  foule  d'idees 
et  de  sentiments  divers  que  fait  naitre  le  terme  utilite 
a  cause  des  differentes  acceptions  qu'il  acquiert  tant 
dans  le  langage  ordinaire,  qu'en  economic  politique  et 
en  d'autres  disciplines. 

"Les  memes  observations  peuvent  etre  repetees  au 
sujet  du  terme  rarete. 

"Pour  ecarter  toutes  ces  equivoques,  M.  Pareto  a 
introduit  dans  la  science  un  nouveau  terme.  II  appelle 
ophelimite,  le  rapport  de  convenance  qui  existe  entre 
un  individu  determine  et  la  quantite  d'un  bien  econo- 
mique  ajoutee  a  une  quantite  donnee  de  ce  meme  bien 
que  cet  individu  a  deja  consommee  ou  dont  il  a  la  dis- 
position. 

"L'ophelimite,  pour  un  individu  X,  d'une  quantite 
h  d'un  bien  economique,  ajoutee  a  une  quantite 
a  (a  pouvant  etre  egale  a  zero]  de  ce  meme  bien 
que  cet  individu  a  deja  consommee  ou  dont  il  a  deja 
la  disposition,  est  le  plaisir  que  lui  procure  la  quan- 
tite h. 

"Soient  <fr  (a)  le  plaisir  que  procure  a  X  la  consom- 
mation  ou  la  possession  de  la  quantite  a  du  bien  econo- 
mique en  question  et  <£  (a  -\-  h}  le  plaisir  procure  par  la 
quantite  a  +  h  de  ce  meme  bien.  L'ophelimite  de  la 
quantite  h  est : 

3>(a  +  h)  -3>(a)  =  A  <D  (a). 


46  A  THEORY   OF  INTEREST 

"  L'ophelimite  elementaire  est  le  quotient  du  plaisir 
provenant  de  la  jouissance  de  la  quantite  h  par  h, 
pourvu  toutefois  que  h  soit  tres  petit  (infiniment  petit) : 

limite  A  4>  (a) 


h  =  o        h 


=  *'  (a) 


"L'ophelimite  elementaire  ponderee  est  le  quotient 
de  la  division  de  1'ophelimite  elementaire  par  le  prix. 

"Indiquons  avec  p  le  prix  du  bien  economique  dont 
1'opheliniite  elementaire  pour  X  est  <&'  (a), 


I*' (a) 


est  1'ophelimite  ponderee.' 


CHAPTER  IV 

INTEREST  AS  A  PRICE 

§  30.  The  thing  whose  price  1  is  interest  is  not  a 
good ;  nor  is  it  a  service  in  the  sense  we  have  given  to  that 
word :  it  is  rather  the  postponement  of  the  consumption 
of  a  good  or  a  service.  Besides  the  objective  and  the 
subjective  factor  of  value,  therefore,  which  constitute 
what  may  be  called  the  two  economic  dimensions  of 
a  good  or  a  service,  this  postponement  whose  price  is 
interest  has  a  third  dimension,  time.  Geometrically 
speaking,  therefore,  it  is  a  solid,  whereas  the  value  of  a 
good  or  a  service  is  only  an  area  or  plane.  Further- 
more, neither  the  objective  nor  the  subjective  factor 
of  the  value  of  some  good  or  service,  which  factors 
constitute  two  of  the  three  dimensions  of  the  thing 
whose  price  is  interest,  necessarily  remains  uniform 
throughout  the  time  that  constitutes  the  third  dimen- 
sion: all  that  is  necessary  is  that  their  product  remain 
uniform  throughout.  In  other  words  the  solid  that 
represents  the  thing  geometrically  is  not  necessarily  a 
parallelepiped  like  Figure  I  on  the  next  page  :  it  may  be 
such  a  solid  as  Figure  II. 

This  will  be  clear  from  the  consideration  of  a  concrete 
case.  Suppose  the  good  is  eight  suits  of  clothes  whose 

1  For  the  correction  required  to  make  this  assertion  accurate  in  all 
cases,  which  would  be  a  useless  interruption  at  this  point,  see  §  33. 

47 


48 


A  THEORY  OF  INTEREST 


total  market  value  corresponds  to  the  price  $100.  Then 
we  may  call  the  objective  factor  of  their  market  value  8, 
and  the  subjective  factor  12^;  and  we  may  represent 
their  value  geometrically  by  the  rectangle  A  BCD 
in  Figure  I.  Suppose,  now,  that  the  suits  are  lent  by 
their  owner  to  somebody  else  with  the  understanding 
that  the  principal  of  the  loan  is  to  be  returned,  with 
interest  added,  at  the  end  of  a  time  measured  by  DH. 


/ 

B 

7 

4 

H 

V 

5-  g- 

/ 

.F' 


FIGURE  I 


<-B & - 

FIGURE  I1 


Then  the  area  of  the  rectangle  EFGH  represents  the 
value  of  the  principal  at  the  later  time,  and  the  whole 
solid  shown  in  Figure  I  represents  the  three-dimensional 
thing  whose  price  is  the  interest.  But  EFGH  is  not  the 
only  rectangle  that  may  represent  the  value  of  the 
principal  of  the  later  time :  any  other  of  the  same  area 
may  represent  it.  Usually,  indeed,  lenders  do  not 
insist  on  the  return  of  the  identical  goods,  the  eight 

1  For  two  notes  on  this  figure,  in  addition  to  those  in  this  section, 
see  the  third  and  fourth  paragraphs  of  §  32. 


INTEREST  AS  A  PRICE  49 

suits,  say,  that  they  lend.  To  do  so  might,  in  the  case 
of  loans  for  a  considerable  time,  be  disastrous  to  them- 
selves ;  for  nobody  can  know  that  the  identical  goods 
will  be  as  valuable  next  year  as  they  are  this  year. 
What  lenders  want  back,  as  "principal,"  is  goods  or 
services  of  the  later  time  having  the  same  nominal 1 
value  (see  §  14)  as  the  goods  or  services  lent.  So  such 
an  area  as  E'F'G'H'  in  Figure  II,  or  any  other  area  of 
100  units,  may  represent  the  value  of  the  principal  of 
the  later  time.  As  the  chances  are  overwhelmingly 
against  the  later  principal's  having  dimensions  pre- 
cisely the  same  as  those  of  the  principal  of  the  earlier 
time,  I  shall  always  use  an  irregular  solid  like  that  of 
Figure  II  rather  than  a  parallelepiped  like  that  of  Figure 
I  to  represent  the  thing  whose  price  is  interest. 

For  this  three-dimensional  thing  whose  price  is 
interest  we  need  a  short  name.  I  propose  to  call  it  an 
advance.  An  advance,  then,  as  we  shall  use  the  word, 
is  not  to  be  confused  with  the  goods  or  services  advanced. 
The  latter  are  things  of  two  dimensions,  whereas  an 
advance  is  a  thing  of  three,  the  third  dimension  being 
time. 

§  31.  Advances  are  of  several  sorts.  I  make  an 
advance  —  whose  cross-section,  parallel  with  A'B'C'D' 
in  Figure  II,  we  may  call  10  and  whose  time-dimension 
we  may  call  5  —  when  I  lend  you  ten  dollars  for  five 
years.  That  sort  of  advance  is  usually  called  a  loan. 
I  make  an  advance  also  if  I  rent  you  a  house.  This 
sort  of  advance  is  usually  called  a  rent  contract  or  a 

1  This  sentence  may  serve  temporarily  as  a  definition  of  the  prin- 
cipal.    See  §§  34  and  35. 
E 


50  A  THEORY   OF  INTEREST 

lease.  It  differs  from  what  we  call  the  loan  at  interest 
in  providing  for  the  return  of  the  identical  good  lent: 
if  a  certain  house  is  advanced  on  a  lease,  it  is  expected 
that  the  very  same  house,  not  any  other  house  or  other 
thing  of  the  same  nominal  value,  will  be  returned  at  the 
end  of  the  time  stipulated.  And  as  any  particular  dura- 
ble good  usually  declines  in  nominal  value  with  the 
passing  of  time,  on  account  of  wear  and  tear,  the  good 
itself  at  the  end  of  the  time  is  usually  not  expected  to 
suffice  for  the  principal  of  the  loan,  and  the  difference 
is  charged  in  money  and  appears  as  the  excess  of  the 
rent  charged  over  what  would  be  interest  at  the  current 
rate  on  the  market  value  of  the  good  at  the  beginning 
of  the  time.  As  investors  express  it,  "If  you  don't  get 
enough  rent  from  a  building  to  yield  you  interest  at 
the  current  rate  above  taxes,  cost  of  repairs,  and 
everything  else  that  must  be  written  off  so  as  to  leave 
your  principal  intact,  the  investment  in  the  building 
is  a  bad  one." 

A  third  sort  of  advance  I  make  when  I  store  up  goods 
for  future  use,  as  when  I  store  part  of  my  harvest  in  the 
cellar  for  use  in  the  winter,  or  when  I  store  up  my  labor 
in  some  concrete  thing  —  a  table,  say,  a  canoe,  a  fence- 
gate  —  whose  services  will  not  repay  me  for  my  labor 
for  a  considerable  time.  This  sort  of  advance  I  make, 
indeed,  even  when  I  merely  reserve  for  its  future  services 
a  durable  good  which  no  person  in  his  senses  and  under 
ordinary  circumstances  would  think  of  treating  other- 
wise but  which  it  would  give  me  more  immediate  pleasure 
to  consume  utterly  at  once,  as  when,  for  instance,  I 
reserve  my  study-table  for  its  future  uses  as  such  instead 


INTEREST  AS  A  PRICE  51 

of  burning  it  in  the  fireplace  the  first  time  I  happen  to 
be  cold,  out  of  fuel,  and  not  especially  in  need  of  a  table 
for  the  moment.  For  making  an  advance  consists 
simply  in  giving  up  an  earlier  pleasure  for  a  later  pleasure 
(presumably  greater).  Nowadays,  of  course,  in  com- 
mercially advanced  countries,  this  third  sort  of  advance 
is  often  made  by  saving  money  or  credit  —  either  of 
which  represents  a  claim  on  some  of  the  market's  goods 
or  services  —  rather  than  by  piling  up  concrete  goods 
or  by  investing  one's  own  labor  directly  in  a  durable 
good ;  but,  equally  of  course,  saving  five  dollars  and  then 
buying  a  wheelbarrow  with  the  money  is  just  the  same, 
so  far  as  our  inquiry  is  concerned,  as  building  the  wheel- 
barrow with  one's  own  saved  labor. 

It  is  to  be  noticed  that  what  is  really  advanced  in  any 
case  is  earlier  services  for  later  services.  If  I  lend  you 
ten  dollars  for  five  years,  I  make  over  to  you  a  claim  on 
the  present  market's  services  —  those  rendered  by  per- 
sons directly,  those  rendered  by  persons  indirectly 
through  goods,  or  those  (of  which  the  services  of  favored 
land  sites  are  examples)  rendered  by  nature  or  by 
society  but  appropriated  by  persons  —  up  to  a  market 
value  represented  by  ten  dollars,  in  exchange  for  a  claim 
on  the  services  of  the  market  of  five  years  hence  to  the 
same  nominal  value,  plus  any  interest  that  may  be 
agreed  on.  If  I  rent  you  a  house,  I  give  you  its  services 
now  in  return  for  its  services  at  the  end  of  the  time 
agreed  on,  plus  the  "  rent."  If  I  store  apples  in  my  cellar 
for  winter  use  I  forego  their  services  —  the  word  is  odd 
in  such  a  connection,  but  there  is  no  harm  in  using  it  • — 
in  the  autumn  to  have  instead  their  services  in  the 


52  A  THEORY  OF  INTEREST 

winter.  If  I  store  up  some  of  my  labor  in  a  canoe  that 
will  not  repay  me  for  that  labor  for  a  considerable  time, 
I  am  exchanging  the  services  —  of  goods  or  of  persons  — 
that  I  could  secure  for  that  labor  now  for  the  services 
of  the  canoe  some  of  which  it  will  render  me  only  after 
the  lapse  of  months  or  years.  As  what  is  advanced  is 
thus  always,  in  the  last  resort,  services,  it  is  permissible 
to  speak  of  it  merely  as  services  instead  of  as  "goods 
or  services,"  as  I  have  done  hitherto.  It  is,  indeed, 
actually  preferable  to  use  the  single  word  only,  because 
doing  so  helps  us  bear  in  mind  what  it  is  that  is  in  all 
cases  really  advanced. 

§  32.  Between  the  first  and  second  sorts  of  advances 
on  the  one  hand  and  the  third  on  the  other  there  is  a 
distinction  that  we  shall  find  to  be  of  the  greatest  signifi- 
cance for  the  theory  of  interest.  Advances  of  the  first 
and  second  sorts  are  from  one  person  to  another;  those 
of  the  third  sort  from  a  person  to  nature.  Advances 
of  the  first  and  second  sorts  only  shift  the  burden  of 
making  an  advance-to-nature  from  one  person's  shoulders 
to  another's,  whereas  those  of  the  third  sort  actually 
lock  up  in  concrete  things  of  the  physical  world,  or  in 
the  relations  to  each  other  of  such  things,  services  that 
will  not  for  a  considerable  time  be  enjoyed  to  a  nominal 
value  equal  to  that  of  the  labor  they  cost. 

The  significance,  for  the  theory  of  interest,  of  this 
difference  between  advances  to  persons  and  advances 
to  nature  appears  when  we  undertake  to  apply  to 
advances  the  theory  of  normal  prices  explained  in  the 
preceding  chapter.  When,  for  instance,  the  diagram 
of  §  25  is  to  be  used  for  advances,  just  what  is  it  that 


INTEREST  AS  A  PRICE  53 

is  to  be  laid  off  along  the  base-line  LI  ?  Are  advances 
to  persons  as  well  as  advances  to  nature  to  be  laid  off 
on  it?  The  question  is  very  puzzling  until  we  realize 
that  an  advance  to  a  person  is  nothing  but  the  sale  to 
him  of  an  advance  to  nature.  Then  it  becomes  clear 
that  the  only  stock  of  advances  that  corresponds,  in  the 
theory  of  the  normal  price  of  advances,  to  the  stock  of 
any  sort  of  goods  or  services  in  the  theory  of  the  normal 
price  of  goods  or  services,  is  that  of  advances  to  nature ; 
and  that  advances  to  persons,  being  really  only  sales  of 
advances  to  nature  —  or  at  least  of  opportunities  to 
make  such  advances  —  do  not  affect  the  normal  price 
of  those  advances  any  more  than  the  sale  of  a  table, 
once  or  a  dozen  times,  affects  the  normal  price  of  tables. 
Nothing  affects  the  normal  price  of  tables  that  does  not 
affect  the  curve  CH  or  the  curve  OR  as  applied  to 
tables ;  nothing  affects  the  normal  price  of  advances  that 
does  not  affect  the  curve  CH  or  the  curve  OR  as  applied 
to  advances ;  and  neither  the  sale  of  a  table  nor  the  sale 
of  an  advance  to  nature  does  affect  either  of  these 
curves,  for  the  reason  that,  so  far  as  these  curves  are 
concerned,  such  a  sale's  effect  on  the  buyer  and  its  effect 
on  the  seller  exactly  cancel  each  other. 

It  will  be  evident  without  detailed  explanation  that 
an  advance  to  nature  is  represented  by  Figure  II  of 
§  30  just  as  well  as  an  advance  to  a  person  is.  When 
that  figure  represents  an  advance  to  nature,  the  area 
A'B'C'D'  represents  the  nominal  value,  100  (corre- 
sponding to  the  price  $100),  of  services  D'C'  which  are 
invested  in  an  advance  to  nature ;  and  the  area  E'F'G'H' 
represents  the  nominal  value  of  the  services  H'G'  of 


54  A  THEORY  OF  INTEREST 

the  later  time  which  constitute  the  principal  of  that 
time. 

In  this  connection  I  will  say  that  it  must  be  admitted 
that  when  a  person  makes  an  advance  to  nature,  and 
often  even  when  he  makes  an  advance  to  a  person,  he 
does  not  receive  back  his  principal  at  the  later  time  in 
one  lump,  so  to  speak,  as  represented  by  my  figures  in 
§  30  and  by  Diagram  III  of  §  52,  but  little  by  little. 
We  are  not  misled,  however,  by  imagining  the  existence 
of  a  sort  of  centre  of  gravity  of  these  returns  that  con- 
stitute the  principal,  and  by  treating  the  point  of  time 
of  that  centre  of  gravity  as  equivalent  to  the  point  of 
time  at  which  the  principal  is  returned  all  together 
when  it  is  returned  thus. 

§  33.  The  correspondence  of  the  two  kinds  of  ad- 
vances, those  to  persons  and  those  to  nature,  with  the 
two  kinds  of  interest  mentioned  in  §  2,  loan  interest  and 
natural  interest,  hardly  requires  pointing  out.  But  we 
must  be  careful  how  we  interpret  the  correspondence. 
We  may  be  inclined  to  jump  at  once  to  the  conclusion 
that  loan  interest  is  always  the  price  of  an  advance  to 
a  person  and  natural  interest  always  the  price  of  an 
advance  to  nature.  But  although  the  former  of  these 
conclusions  is  true  always,  the  latter  is  true  only  in  some 
cases.  Take  the  case  of  a  manufacturer :  he  buys  the 
services  of  one  time,  those  of  a  factory  building,  of 
laborers  and  superintendents,  of  raw  materials,  and  so 
forth,  and  he  sells  the  services  of  a  later  time,  those  of 
the  products  he  manufactures,  which  later  services  are 
the  effects  of  which  the  earlier  services  were  the  causes ; 
and  the  natural  interest  that  normally  accrues  to  him 


INTEREST  AS  A  PRICE  55 

from  the  transaction  appears  in  the  concrete  form  of  a 
difference  between  the  money  paid  for  the  earlier  ser- 
vices and  that  received  for  the  later.  In  his  case,  there- 
fore, the  natural  interest  accruing  might  be  called  a 
price,  the  price  of  the  advance  to  nature  in  which  the 
investment  necessary  between  the  two  times  is  embodied. 
But  in  the  case  of  a  person  who  does  not  both  buy  the 
earlier  services  and  sell  the  later,  the  natural  interest, 
though  it  may,  indeed,  accrue,  does  not  appear  in  the 
concrete  form  of  a  difference  between  prices,  and  there- 
fore need  not  necessarily  be  called  a  price.  For  exam- 
ple take  the  case  of  a  man  who  buys  a  pleasure  carriage 
at  one  time  and  enjoys  its  services  at  later  times.  In  his 
case  the  natural  interest  normally  accruing  may  be 
regarded  in  either  of  two  aspects  :  it  may  be  regarded  as 
the  difference  between  the  price  paid  for  the  earlier 
services  (those  invested  in  the  building  of  the  car- 
riage) and  that  which  would  have  been  paid  for  the  later 
services  (those  rendered  by  the  carriage)  if  these  latter 
had  been  bought  apart  from  the  carriage  itself  and  at 
the  times  at  which  they  were  to  be  rendered ;  or  it  may 
be  regarded  as  the  difference  between  the  pleasure 
which  the  price  spent  on  the  carriage  would  have 
afforded  if  it  had  been  spent  on  immediate  enjoyment 
and  the  pleasure  afforded  by  the  carriage  on  the  many 
later  occasions  when  it  is  used.  Regarded  in  the  former 
aspect,  it  is  a  price ;  regarded  in  the  latter  aspect,  it  is  a 
value.  If  now  we  consider  a  third  kind  of  case,  that  of 
a  person  quite  isolated  from  the  market  for  services, 
like  Crusoe,  we  find  one  in  which,  though  natural  inter- 
est may  accrue,  it  cannot  possibly  be  calculated  in 


56  A  THEORY  OF  INTEREST 

terms  of  price,  for  the  reason  that  there  is  no  such 
thing  as  price  in  Crusoe's  world.  That  natural  interest 
may  accrue  to  Crusoe  is  demonstrated  later  in  this 
chapter  (§  51).  That  in  his  case  it  must  be  reckoned  in 
terms  of  pleasure  and  pain  only  is  evident  from  the  mere 
fact  that  neither  his  services  nor  those  of  the  goods  he 
may  make,  or  may  possess  without  making,  are  men- 
surable objectively  in  terms  of  prices :  they  are  men- 
surable only  in  terms  of  his  own  pleasure  and  pain.  - 
Having  thus  carefully  qualified  the  statement  that 
natural  interest  is  the  price  of  an  advance  to  nature,  I 
shall  allow  myself  sometimes,  hereafter  as  hitherto, 
when  convenience  seems  to  require  it,  to  speak  of  interest 
as  if  it  were  always  a  price. 

§  34.  Before  undertaking  now  to  apply  to  advances 
the  theory  of  normal  prices  developed  in  the  previous 
chapter,  it  will  be  well  for  us  to  review  some  points  of 
the  definition  of  advances. 

An  advance  is  not  to  be  confused,  in  the  first  place, 
with  the  services  advanced  or  with  their  value  to  any 
person  or  market :  the  services  are  to  their  value  — 
either  their  value  to  any  person  or  their  market  value  - 
what  a  line  is  to  an  area ;  and  their  value  is  to  the  ad- 
vance itself  what  an  area  is  to  a  solid.  In  Figure  II 
of  §  30  the  line  D'C',  the  line  H'G' ',  or  any  line  in  the 
solid  parallel  with  these,  represents  the  services  advanced 
in  the  case.  The  plane  A'B'C'D',  on  the  other  hand, 
or  any  plane  in  the  solid  parallel  to  it,  represents  the 
nominal  value  of  those  services.  And  finally  the  whole 
solid  represents  the  advance  itself,  the  third  dimension 
of  the  advance,  namely  time,  being  represented  by  the 


INTEREST  AS   A  PRICE  57 

distance   between  the  plane  A'B'C'D'  and  the  plane 
E'F'G'H'. 

In  the  second  place,  the  nature  of  that  subjective 
factor  of  value  which  is  part  of  the  definition  of  the  prin- 
cipal must  not  be  lost  sight  of.  In  Figure  II  of  §  30 
that  subjective  factor  is  represented,  of  course,  by 
A'D'  or  any  other  line  parallel  to  it,  in  other  words 
by  the  up-and-down  dimension  of  the  plane  A'B'C'D' 
or  of  any  other  plane  parallel  to  it  in  the  solid.  In  the 
case  of  an  advance  to  a  person  it  is  always  the  subjective 
factor  of  nominal  value,  that  is,  the  subjective  factor 
of  value  to  the  market  of  the  "changing  society" 
existing  at  the  successive  moments  of  a  passing  time  — 
explained  in  §  14.  In  the  case  of  an  advance  to  nature 
by  an  advancer  who  has  access  to  the  market  for 
services,  it  is  the  same.  In  the  case  of  an  advance 
to  nature  by  an  advancer  who  does  not  have  access 
to  the  market  for  services,  it  cannot  be  the  subjective 
factor  of  nominal  value,  because  there  is  no  such  thing 
as  nominal  value  in  the  world  of  such  an  isolated  ad- 
vancer :  in  his  case  it  must  be  something  else,  as  ex- 
plained in  §  51. 

§  35.  For  the  present  we  shall  confine  ourselves  to 
the  consideration  of  advances  made  by  persons  having 
access  to  a  market  for  services.  Of  such  advances  the 
principal,  as  explained  above,  is  two  lots  of  services  of 
two  separated  times  but  of  the  same  nominal  value. 
The  subjective  factor  of  the  principal  of  such  advances, 
in  other  words,  is  the  need  of,  or  capacity  to  receive 
pleasure  from,  the  services  in  question,  on  the  part  of 
the  society  that  happens  to  constitute  the  market  at  the 


58  A  THEORY  OF  INTEREST 

moment,  relatively  to  the  same  society's  need  of,  or 
capacity  to  receive  pleasure  from,  any  other  thing  in 
that  market.  To  lose  sight  of  this  point  of  the  definition 
of  those  advances  to  which  we  shall  now  apply  the  theory 
of  normal  prices,  is  to  miss  the  true  solution  of  the  in- 
terest problem,  for  this  point  is  the  elusive  secret  of  that 
problem. 

Of  the  two  sorts  of  advances  made  by  persons  having 
access  to  a  market  for  services,  advances  to  persons  and 
advances  to  nature,  the  former  are  to  the  latter,  as  ex- 
plained in  §  32,  exactly  what  the  sale  of  a  suit  of  clothes 
is  to  the  investment  of  services  in  making  it.  The  point 
is  important  and  may  well  be  explained  here  again  more 
fully. 

Making  an  advance  to  a  person  can  no  more  affect  the 
price  of  advances  than  selling  a  suit  of  clothes  can  affect 
the  price  of  suits,  for  making  an  advance  to  a  person  is 
virtually  selling  that  person  an  advance  to  nature  of  the 
same  dimensions.  My  lending  you  $100  for  a  year 
makes  it  possible  for  you  to  invest  your  labor  to  the  value 
of  $100  in  an  advance  to  nature,  for  example  in  making 
a  durable  good  worth  that  amount,  just  one  year  be- 
fore you  could  do  so  without  the  loan  unless  you  en- 
croached to  that  extent  on  your  leisure  or  on  the  labor 
you  wanted  to  devote  to  other  ends.  It  is  therefore 
simply  selling  you  an  advance  to  nature  of  the  same 
dimensions.  And  such  a  sale  cannot  affect  the  price 
of  advances  to  nature  because  it  neither  increases  nor 
decreases  the  value  of  the  marginal  unit  of  advances  to 
nature.  This  latter  it  could  not  do  unless  it  respectively 
decreased  or  increased  the  supply  of  advances  to  nature, 


INTEREST  AS  A  PRICE  59 

and  certainly  it  does  not  affect  that  supply  in  the  small- 
est degree. 

Making  an  advance  to  nature,  on  the  other  hand,  does 
affect  the  price  of  such  advances,  and  through  them  the 
price  of  advances  to  persons.  For  making  an  advance 
to  nature  increases  the  supply  of  such  advances  and 
therefore  decreases  the  value  of  the  marginal  unit  of  that 
supply. 

Making  an  advance  to  nature  locks  up,  as  it  were,  in 
the  storehouse  of  nature's  causal  nexus,  services  to  a 
nominal  value  greater  than  that  of  those  forthcoming 
therefrom  before  the  lapse  of  a  considerable  time ; 
whereas  making  an  advance  to  a  person  does  not  lock  up 
services  at  all,  but  only  transfers  from  the  lender  to  the 
borrower  the  title  to  their  disposal  —  they  being  meas- 
ured, for  the  purpose  of  the  transaction,  in  terms  of  nomi- 
nal value  —  for  the  time  covered  by  the  loan.  Advances 
to  nature  might  therefore  conceivably  have,  if  supplied 
in  inconveniently  large  amounts,  a  market  cost,  which 
might  rise  with  each  further  advance  so  as  at  some  point 
to  balance  any  value  that  further  advances  to  nature 
might  have,  thus  checking  the  making  of  further  such 
advances  and  establishing  a  normal  price  of  advances 
to  nature,  which  would  be  also  the  normal  price  of  ad- 
vances to  persons.  Advances  to  persons,  on  the  other 
hand,  giving  to  borrowers,  as  they  do,  the  disposal  of  ser- 
vices precisely  the  same  in  nominal  value  as  those  whose 
disposal  for  the  same  time  they  take  from  the  lenders, 
cannot  conceivably  be  affected  in  cost  by  their  own 
indefinite  increase  in  amounts.  The  amount  of  their 
supply,  therefore,  has  no  significance  whatever  in  respect 


60  A  THEORY  OF  INTEREST 

to  their  price.  And  so  we  come  back  again  to  the  asser- 
tions made  in  §  32  that  advances  to  persons  are  not  to 
be  laid  off  along  the  base-line,  L7,  of  the  price  diagram, 
their  price  being  determined  by  the  supply  of  advances 
to  nature,  of  which,  indeed,  as  I  have  said,  they  may  be 
regarded,  unless  we  find  evidence  to  the  contrary,  as 
simply  sales. 

§  36.  We  need  not  repeat  in  respect  to  advances  to 
nature  the  reasons,  given  in  the  fourth  paragraph  of  §  14, 
the  second  of  §  15,  the  second  of  §  18,  and  the  seventh  of 
§  25,  why  costs  and  values  to  a  market  must  correspond 
to  costs  and  values  to  any  person  in  touch  with  that 
market,  and  why  therefore  a  diagram  representing  the 
costs  and  the  values  of  advances  to  nature,  on  the  suppo- 
sition of  the  increase  of  the  supply  of  such  advances  by 
successive  increments,  will  serve  indifferently  for  the 
market  in  such  advances  or  for  any  person  in  touch  with 
it :  these  reasons  hold  for  the  theory  of  the  price  of  ad- 
vances to  nature  precisely  as  for  that  of  the  price  of 
goods  or  services.  We  are  therefore  ready  to  plan  at 
once  the  construction  of  the  diagram  representing 
graphically  the  theory  of  the  normal  price  of  advances 
to  nature.  In  this  planning  we  must  proceed  slowly, 
for  if  we  are  to  be  sure  of  every  step  we  must  halt  often 
for  necessary  definitions  and  precautions. 

Along  a  base-line  LI l  lay  off  successive  units  of  the 
things  of  value  in  question,  namely  the  advances  to 
nature  existing  in  connection  with  the  market  (for  ad- 
vances to  nature)  in  question.  This  market  we  may 
think  of  as  that  of  the  whole  commercial  world.  Along 

1  See  Diagram  II,  below  (§  41). 


INTEREST   AS  A  PRICE  6 1 

LK,  perpendicular  to  LI,  lay  off  successive  units  of  both 
the  subjective  factor  of  the  value  of  such  advances  and 
the  subjective  factor  of  their  cost.  This  is  assuming, 
of  course  —  what  has  already  been  assumed  several 
times  in  the  last  few  pages —  that  advances  to  nature 
may  have  both  a  value  and  a  cost.  These  points  must 
now  be  fully  established. 

§  37.  Advances  to  nature  may  have  a  value,  both  a 
personal  value  and  a  market  value.1  They  have  a  value 
if  locking  up  in  the  storehouse  of  nature's  causal  nexus 
services  greater  in  nominal  value  than  those  for  a  con- 
siderable time  forthcoming  from  that  nexus  on  that 
account  results,  after  the  lapse  of  enough  time,  in  the 
receiving  back  of  services  exceeding  in  nominal  value 
those  locked  up ;  for  if  it  results  thus,  the  excess  in  nomi- 
nal value  of  the  services  received  back  after  "enough 
time"  is  the  market  value  of  that  advance  to  nature 
whose  time-dimension  is  the  time  elapsed  and  whose 
cross-section  of  nominal  value  (see  §  30)  is  that  of  the 
services  locked  up  at  the  earlier  time  and  also  that,  less 
the  excess,  of  the  services  received  back  at  the  later 
time.  And  locking  services  up  in  the  storehouse  of  na- 
ture's causal  nexus  certainly  does  often  result  thus.  It 
does  so  in  the  case  of  the  building  of  any  railway  that 
under  normal  conditions  earns,  net  above  all  expenses 
of  running  it,  more  than  enough  to  repay  its  original  cost. 
It  does  so  in  the  case  of  the  making  of  any  durable  good 

1  They  may,  indeed,  have  also  a  nominal  value,  as  will  appear  from 
a  consideration  of  two  advances  to  nature  separated  in  time ;  but  the 
analysis  of  this  point  need  not  now  turn  us  aside  from  our  main  argu- 
ment. 


62  A  THEORY  OF  INTEREST 

-  that  is,  any  good  whose  immediate  services  do  not  pay 
for  its  making  —  whose  services  eventually  sell,  under 
normal  conditions,  for  more  than  enough,  to  pay  all  costs 
of  making  it  and  of  keeping  it  in  good  condition  and  re- 
pair up  to  that  time.  It  does  so,  indeed,  in  the  case  of 
the  making  of  anything,  or  of  the  affecting  of  any  rela- 
tion between  things,  which,  though  not  worth  while  for 
its  immediate  returns,  is  worth  while  for  its  eventual 
returns  —  worth-whileness  being  determined  always  on 
a  nominal  value  basis.  Was  it  worth  while  to  build  the 
Brooklyn  Bridge  ?  Certainly  not  for  the  pleasure  each 
stroke  on  it  could  return  immediately,  before  the  lapse 
of  any  considerable  time.  The  building  of  it  was  there- 
fore undoubtedly  a  locking  up  of  services  in  the  store- 
house of  nature's  causal  nexus,  whether  it  was  worth 
while  or  not.  Next,  was  it  worth  while  on  the  basis  of 
a  gain  in  nominal  value?  The  answer  can  be  inferred 
from  the  fact  that  if  it  had  not  promised  to  be  worth 
while  on  that  basis,  it  would  have  been  economically 
senseless.  Nothing  that  we  call  a  tool,  a  machine,  or 
a  durable  consumption  good  normally  renders  services 
that  cancel  its  cost  until  considerable  time  has  elapsed. 
It  is  therefore  permissible  to  say  sweepingly  that  never, 
under  normal  conditions,  can  it  be  rational  to  make  a 
tool,  a  machine,  a  house,  a  doll,  or  any  other  durable  good 
unless  the  locking  up  of  services  in  it  promises  an  eventual 
surplus  of  nominal  value.  Thus  that  vast  aggregate  of 
advantage  received  by  mankind  on  account  of  their 
making  and  possessing  the  tools,  machines,  houses,  toys, 
and  other  durable  goods  that  they  have  made,  is  simply 
the  aggregate  of  the  surplus  nominal  values  due  to  the 


INTEREST  AS  A  PRICE  63 

advances  to  nature  embodied  in  the  total  supply  of  such 
things. 

§  38.  It  is  convenient  to  have  a  brief  name  for  goods, 
including  not  only  namable  things  but  any  relations  be- 
tween things,  in  which  advances  to  nature  are  locked  up. 
What  name  is  better  for  them  than  natural  capital? 
By  natural  capital  I  mean  anything  in  which  an  advance 
to  nature  is  locked  up,  including  notably  tools,  machines, 
and  durable  consumption  goods — from  carriages  to  jump- 
ing-jacks  —  but  not  excluding  less  discrete  and  namable 
things  that  may  embody  advances  to  nature.  An  ex- 
ample of  these  latter  things  is  furnished  in  the  case  of  the 
advances  to  nature  made  by  the  researches  of  a  scientist. 
The  labors  of  a  Pasteur  or  a  Helmholtz,  of  an  Edison  or 
a  Burbank,  are  certainly  advances  to  nature,  except  in 
so  far  as  they  may  be  repaid  immediately  by  the  pleasure 
of  the  work  itself ;  yet  they  do  not  always  embody  them- 
selves in  discrete  and  namable  objects.  Other  examples 
are  furnished  in  the  cases  of  the  advances  to  nature  made 
in  moving  a  barrel  of  apples  from  Ontario  to  London  — 
from  where  it  is  needed  less  to  where  it  is  needed  more 
-  or  in  developing  mutual  regard  and  esprit  de  corps 
among  the  employees  of  a  factory  with  a  view  to  increas- 
ing its  production  without  increasing  the  pain  of  the 
employees'  labor.  In  all  these  cases  the  services  ad- 
vanced are  locked  up  in  the  nexus  of  natural  laws  even 
though  not  embodied  in  discrete  and  namable  objects; 
and  their  embodiments  are  all  to  be  included  under  the 
term  natural  capital. 

In  connection  with  this  definition  of  natural  capital 
one  limitation  must  be  made.     Not  only  does  the  term, 


64  A  THEORY  OF  INTEREST 

as  I  use  it,  exclude  things,  such  as  rivers,  natural  harbors, 
and  the  gifts  of  nature  generally,  whose  valuable  services 
are,  clearly  independent  of  the  previous  investment  in 
them  of  human  labor,  the  previous  embodiment  in 
them  of  advances  to  nature,  but  it  excludes  even  such 
of  the  embodiments  of  advances  to  nature  as  do  not 
owe  those  advances  to  identifiable  persons  moved  by 
economic  motives.  It  excludes,  for  example,  those 
groupings  of  population  and  of  social  institutions  which 
result  in  the  great  services  (of  urban  land-sites)  that  we 
buy  at  their  market  price  when  we  pay  high  urban  land- 
rents.  Such  groupings  are  not  direct  gifts  of  nature 
but  embodiments  of  the  political  and  social  labors  of 
men,  and  therefore  they  constitute  what  might  not  un- 
reasonably be  regarded  as  a  kind  of  capital ;  yet  the  dis- 
tinction between  them  and  the  capital  in  which  men 
embody  advances  to  nature  with  the  conscious  intention 
of  enjoying  both  principal  and  interest  later  —  this 
distinction,  I  say,  is  so  important  for  the  light  it  throws 
on  the  justice  or  injustice  of  certain  social  institutions 
that  such  groupings  had  better  not  be  included  under 
the  term  natural  capital.  They  will  be  treated  further 
and  given  a  suitable  name  in  §  106  of  Chapter  VIII. 

§  39.  To  return  now  to  the  main  line  of  our  thought, 
advances  to  nature  may  have  cost,  both  personal  cost 
and  market  cost.  This  is  not  denying,  of  course,  that 
some  advances  to  nature  may  be  made  without  cost. 
If  your  provision,  relatively  to  your  wants,  is  greater 
this  year  than  it  will  be  next  year,  you  can  certainly 
make  some  advances  to  nature  without  cost.  (This 
corresponds  to  the  principle,  in  the  theory  of  the 


INTEREST  AS  A  PRICE  65 

normal  price  of  goods  or  services,  that  some  persons 
under  some  circumstances  may  be  able  to  raise  a  few 
apples  or  play  a  few  sonatas  without  cost.)  But  if, 
after  the  making  of  all  the  advances  to  nature  thus 
made  without  cost,  it  is  found  that  an  additional 
advance  1  would  have  value — not  value  above  cost,  of 
course,  but  value  simply  —  economically  rational  per- 
sons are  impelled  to  make  the  additional  advance  at  any 
necessary  cost  to  them  less  in  their  estimation  than  the 
value  to  them  it  will  have.  And  so,  normally,  rational 
persons  will  go  on  making  more  and  more  advances  at 
ever  increasing  cost  until  they  reach  the  point  of  normal 
equilibrium  where  the  value  to  them  of  a  further  ad- 
vance would  not  in  their  estimation  exceed  its  cost  to 
them.  Indeed,  it  is  only  the  (estimated 2)  cost  of  further 
advances  that  can  account  for  the  fact  that  every  person 
in  touch  with  the  market  fails  to  make  certain  further 
advances  that  he  does  fail  to  make.  For  every  such 
person  certainly  ceases  making  advances  before  he  has 
advanced  the  last  unit  of  his  income  or  his  vital  force ; 
certainly,  too,  every  such  person  could  get  at  least  2  % 
interest  —  that  is,  surplus  nominal  value  amounting  in 
a  year  to  two  hundredths  of  the  nominal  value  of  the 
principal,  and  that  without  appreciable  danger  of  losing 
the  principal  —  by  making  the  first  of  the  advances  he 
fails  to  make ;  and  therefore  nothing  but  the  (estimated) 
cost  of  that  first  one  of  his  unmade  advances  can  account 

1  Here,  as  elsewhere,  it  is  important  for  the  reader  not  to  confuse  in 
his  mind  an  advance  with  the  goods  or  services  advanced. 

2  For  the  significance  of  this  word  see  the  fifth  paragraph  of  §  41 
below. 


66  A   THEORY   OF  INTEREST 

for  any  such  person's  discontinuing  to  make  advances  at 
the  point  where  he  does  discontinue. 

As  it  is  now  clear  that  advances  to  nature  do  in  some 
cases  have  value  and  do  in  some  cases  have  cost,  we  may 
continue  the  planning,  undertaken  in  §  36,  of  our  dia- 
gram to  illustrate  the  theory  of  the  normal  price  of  ad- 
vances to  nature. 

§  40.  Note  well  just  which  advances  to  nature  are  to 
be  laid  off  along  the  base-line,  LI.  They  must  include 
all  those  that  actually  constitute  the  world-market's 
supply,  but  they  must  not  include  any  others.  They 
must  not  include,  for  example,  advances  existing  pre- 
viously but  not  existing  at  the  time  in  question,  which  for 
convenience  may  be  assumed  to  be  the  present.  This 
excludes  advances  once  embodied  in  certain  old  walls, 
for  example,  stone  arrow-heads,  and  what-not,  that  exist 
still  but  can  no  longer  be  said  to  embody  advances  be- 
cause they  are  no  longer  useful  and  therefore  no  longer 
kept  in  their  old  embodiments  purposely.  They  must 
not  include,  furthermore,  advances  conceived  as  em- 
bodied in  the  natural  capital  men  would  invest  in  if  they 
were  perfect  in  knowledge  and  skill,  or  if  any  conditions 
were  in  any  way  other  than  they  are.  This  requires  a 
little  explanation.  Nature  offers  men,  as  we  have  seen, 
opportunities  to  lock  up  services  in  natural  capital  whose 
services  in  turn,  after  the  lapse  of  more  or  less  time,  will 
have  a  nominal  value  in  excess  of  that  of  the  services 
locked  up.  But  in  their  capacity  for  taking  advantage 
of  these  opportunities  men  are  restricted  by  the  limita- 
tions of  the  knowledge  possessed  by  scientists,  by  those 
of  the  diffusion  of  that  knowledge  among  the  people 


INTEREST  AS  A  PRICE  67 

r 

generally,  and  by  those  of  the  industrial  skill  and  the 
capacity  for  taking  pains,  on  the  part  of  laborers,  requi- 
site for  using  certain  conceivable  sorts  of  natural  capital 
—  complicated  machines,  for  instance  —  to  the  best  ad- 
vantage. Thus  the  series  of  advances  to  nature  laid  off 
along  the  line  LI,  which  is  to  represent  the  actual  supply 
at  the  time  in  question,  lacks  nobody  knows  how  many  or 
what  advances  to  nature  that  are  conceivable,  and  that 
may  sometime  through  a  change  of  conditions  come  into 
existence,  but  that  are  not  in  existence  because  not  un- 
derstood or  because  uneconomical  under  the  conditions 
of  the  time  in  question.  The  series  of  such  advances 
existing  at  present  (A.D.  1913),  for  example,  lacks  those 
that  might  conceivably  be  embodied  in  certain  physically 
possible  but  as  yet  uninvented  improvements  of  the  aero- 
plane, those  that  might  conceivably  be  embodied  in  ad- 
ditional specimens  of  an  improvement  of  the  aeroplane 
already  invented  but  not  yet  understood  by  all  airmen 
who  could  adopt  it  with  advantage  if  they  did  under- 
stand it,  and  those  that  might  conceivably  be  embodied 
in  additional  reaping  machines,  of  a  model  already  used 
to  advantage  by  thousands  of  farmers,  which  would  have 
been  manufactured  if  the  ignorance,  stupidity,  or  shift- 
lessness  of  certain  other  farmers  or  their  hired  laborers 
had  not  prevented  their  being  able  to  use  such  machines 
to  advantage  and  their  demanding  them  in  the  market. 

The  order  in  which  the  advances  to  nature  laid  off 
along  LI  are  to  be  arranged  is,  of  course,  that  of  the 
market  value  they  would  have,  under  the  actual  condi- 
tions of  scientific  knowledge,  general  education,  skill,  etc., 
if  they  were  marginal.  Next  to  L,  in  other  words,  must 


68  A   THEORY  OF  INTEREST 

stand  the  advance  to  nature  embodied  in  whatever 
natural  capital  society  could  least  afford,  under  actual 
conditions,  to  be  deprived  of.  Next  to  that  first  one  must 
stand  the  advance  to  nature  embodied  in  whatever  natu- 
ral capital  society  could  next  least  afford  to  be  deprived 
of.  And  so  on  through  the  whole  series  of  existing  ad- 
vances to  nature.  Very  high  in  the  series  of  the  present 
time  must  stand  some  of  the  advances  embodied  in  iron 
foundries  and  steel  plants,  some  of  those  embodied  in 
printing  presses,  some  of  those  embodied  in  the  main 
railway  lines,  and  some  of  those  embodied  in  well-bred 
stocks  of  domestic  animals.  Lower  in  the  series  must 
stand  additional  units  of  advances  embodied  in  natural 
capital  of  these  same  kinds  and  also  the  first  units  of 
advances  embodied  in  natural  capital  of  less  important 
kinds.  Lowest  of  all  in  the  series  must  stand  advances 
embodied  in  that  natural  capital  which  under  normal 
conditions  men  would  sacrifice  first  if  they  had  to  sacri- 
fice part  of  their  present  supply. 

§  41.  When  the  units  of  the  actual  supply  of  advances 
to  nature  are  arranged  thus  along  the  base-line,  the 
market  value  of  any  unit,  on  the  supposition  that  it  is 
the  marginal  or  last  unit  of  the  supply,  is  represented  by 
the  length  of  a  line  perpendicular  to  the  base-line  from 
the  position  of  the  unit  on  the  base-line  to  its  intersec- 
tion with  such  a  curve  as  OR. 

Now  consider  how  we  may  represent  the  cost  of  the 
units  of  advances  to  nature  laid  off  along  LI.  The  unit 
which,  if  marginal,  would  have  the  highest  value,  that  is, 
the  unit  we  have  placed  nearest  to  L  on  LI,  would  have 
least  cost,  or  —  if  we  suppose  that  a  few  units,  between  L 


INTEREST  AS  A  PRICE 


69 


and  S,  would  have  no  cost  at  all  —  would  be  farthest 
below  the  cost  line.  The  unit  which,  if  marginal,  would 
stand  second  in  value,  that  is,  the  unit  we  have  placed 
next  nearest  to  L  on  LI,  would  have  the  next  higher 
cost  or  stand  next  higher  towards  the  line  where  cost 
would  begin.  And  so  on :  when  the  units  of  advances  are 
arranged  in  the  order  of  their  descending  values  —  to  the 
advancer  or  to  the  market  of  any  specified  time  —  if 

K 


DIAGRAM  n 

each  were  marginal,  they  must  be  arranged  —  normal 
conditions  being  assumed  throughout  —  in  the  order  of 
ascending  costs.  This  is  confirmed  by  a  moment's  re- 
flection. For  a  man  to  advance  for  a  year  the  first 
dollar  of  his  yearly  income,  which,  of  all  the  dollars  he 
may  advance,  is  the  one  whose  advance  will  normally  be 
most  valuable  either  to  himself  or  to  the  market,  requires 
his  sacrificing  the  enjoyment  now  of  those  services  a 
dollar  will  now  buy  that  he  is  most  willing  to  sacrifice 
now,  in  order  to  have  the  enjoyment  next  year  of  those 
services  a  dollar  will  then  buy  that  he  will  be  most  willing 
to  sacrifice  then.  (The  surplus  services  which  the  three 


70  A  THEORY  OF  INTEREST 

or  four  cents  he  may  receive  as  interest  will  buy  next 
year  do  not  concern  us  in  respect  to  the  mere  cost  of  the 
advance :  they  concern  us  only  in  respect  to  its  value.) 
For  the  same  man  to  advance  for  a  year  the  thousandth 
dollar  of  his  yearly  income,  that  is,  one  dollar  of  a  thou- 
sand advanced,  affects  him  very  differently :  the  thou- 
sandth dollar,  which  is  applicable  normally,  as  we  have 
seen,  to  a  less  valuable  advance  than  the  first  dollar,  re- 
quires the  advancer  to  sacrifice  the  enjoyment  now  of 
services  a  dollar  will  now  buy  standing  a  thousand  points, 
so  to  speak,  higher  on  his  list  of  services  arranged  accord- 
ing to  his  preferences,  in  order  to  have  the  enjoyment  next 
year  of  services  a  dollar  will  then  buy  standing  a  thousand 
points  lower  on  his  list.  Clearly,  whatever  may  be  the 
cost  —  to  any  person  or  group  of  persons,  however  rich 
or  however  poor  —  of  advancing  for  any  time  any  speci- 
fied unit  of  income,  the  cost  of  advancing  for  the  same 
time  the  next  additional  unit  must  be  greater. 

The  normal  market  cost,  then,  of  any  unit  of  the  exist- 
ing advances  to  nature  laid  off  along  LI  is  represented  by 
the  length  of  a  line,  perpendicular  to  L7,  from  the  posi- 
tion of  the  unit  on  LI  up  to  such  a  curve  as  CH,  which  is 
drawn  so  as  to  bound  the  cost  lines  of  all  the  units.  The 
costlessness  that  may  characterize  some  few  units  nearest 
to  L  (see  §  39)  is  indicated  in  the  diagram  by  drawing 
CH  below  LI  until  it  reaches  a  point,  S,  somewhat  to 
the  right  of  L. 

In  explaining  the  two  curves,  OR  and  CH,  I  have 
spoken  only  of  market  value  and  market  cost  respec- 
tively. I  do  not  mean  to  imply,  however,  that  the  same 
curves  would  not  represent  equally  well  the  boundary  of 


INTEREST  AS  A  PRICE  71 

the  lines  of  the  value  and  the  cost  of  the  different  units  to 
any  particular  person.  They  would  do  so,  for  reasons  ex- 
plained in  §  14  (IF  4),  §  J5  (1[2),§  18  (H  2),  and  §  25  (^7), 
and  referred  to  in  the  first  paragraph  of  §  36  :  the  whole 
diagram  represents  consistently  either  values  and  costs 
from  the  market's  point  of  view  or  values  and  costs  from 
the  point  of  view  of  any  person  in  touch  with  the  market. 
The  reason  why  I  neglect  sometimes  the  personal  point 
of  view  is  that  the  goal  of  this  part  of  our  inquiry  is  an 
understanding  of  the  normal  price  of  advances  to  nature, 
to  which  price,  of  course,  the  market  values  and  the 
market  costs  of  the  units  of  such  advances  are  more 
closely  related,  in  our  thinking,  than  are  their  personal 
values  or  their  personal  costs. 

If  now  we  make  one  slight  change  in  the  definition  of 
these  curves,  we  shall  be  free  to  complete  our  diagram 
for  advances  to  nature  as  we  did  that  for  goods  and  ser- 
vices, by  dropping  from  the  point  of  intersection  of  the 
two  curves  a  perpendicular  to  LI  which  will  represent 
the  normal  price  of  such  advances.  The  two  curves  of 
significance  to  us,  those  the  perpendicular  from  whose 
intersection  will  represent  the  normal  price  of  advances, 
are  not  precisely  those  we  have  described,  those  bounding 
the  lines  of  value  and  cost,  but  those  bounding  the  lines 
of  estimated  value  and  estimated  cost.  For  of  course  it  is 
not  necessarily  where  the  value  to  him  of  advancing 
another  unit  actually  fails  to  exceed  the  cost  to  him  of 
advancing  it  that  any  advancer  normally  *  ceases  making 
advances :  it  is  where  it  fails  to  do  so  in  his  estimation. 
The  normal  value  to  any  person  of  a  unit  of  advances 

1  See  the  third  paragraph  of  §  18. 


72  A  THEORY  OF  INTEREST 

will  be  determined  by  the  point  of  intersection  of  his 
curves  of  estimated  value  and  estimated  cost  instead  of 
by  the  point  of  intersection  of  his  curves  of  value-in-fact 
and  cost-in-f  act.  This  possible  error  of  estimation,  by  the 
way,  is  the  one  excepted  cause,  preventing  "men's  acting 
according  to  their  best  economic  interests,"  to  which  I 
referred  when  denning  the  word  normal  in  the  third 
paragraph  of  §  18 :  in  respect  to  advances  I  call  condi- 
tions normal  when  men  are  prevented  from  acting  ac- 
cording to  their  best  economic  interests  by  nothing  except 
this  error  of  estimation. 

If  the  curves  of  our  diagram  are  reinterpreted  thus  as 
indicating  estimated  values  and  estimated  costs  instead 
of  actual  values  and  actual  costs  —  to  the  market,  of 
course,  as  well  as  to  the  person  —  it  becomes  correct  to 
say  that  the  height  above  the  base-line  of  their  point  of 
intersection  represents  the  normal  market  value  or  the 
normal  price  of  a  unit  of  advances  to  nature. 

§42.  "The  height  above  the  base-line,"  I  say.  Is  it, 
then,  inevitable  that  the  intersection  of  the  curves  will 
be  above  the  base-line  ?  Is  it  inevitable,  in  other  words, 
that  the  line  WV,  representing  the  normal  price  of  a  unit 
of  advances  to  nature,  will  have  positive  length  ?  The 
question  is  crucial,  for  the  price  of  advances  to  nature, 
per  unit,  is  nothing  else,  as  we  shall  soon  see,  than  the 
rate  of  natural  interest.  The  answer  is  in  the  affirmative  : 
the  line  WV  must  normally  have  positive  length;  the  price 
of  advances  to  nature,  per  unit,  or  the  rate  of  natural  interest, 
must  normally  be  above  zero.  Evidence  of  the  truth  of 
this,  to  be  interpreted  now  in  accordance  with  the  modi- 
fication about  the  error  of  estimation  in  the  fifth  para- 


INTEREST  AS  A  PRICE  73 

graph  of  §  41,  was  given  in  §  39.  It  is  not  conceivable 
that  everybody  would  cease  making  advances  to  nature 
at  a  point  where,  with  no  appreciable  danger  of  losing 
the  principal,  they  could  still  get  "2%  interest"  by 
making  more  advances  unless  a  further  advance  would 
have  for  them  positive  cost ;  for  certainly  services  which 
the  "2%  interest"  obtainable  by  making  the  further 
advance  would  buy  would  have  for  them  positive  value. 

This  evidence  for  the  inevitability  of  a  positive  rate  of 
interest  is,  I  say,  sound.  I  do  not  say,  however,  that,  by 
itself,  it  is  thoroughly  convincing.  It  will  scarcely 
change  the  views  of  readers  who  felt  sure,  before  reading 
this  book,  that  a  positive  rate  of  interest  is  by  no  means 
inevitable  but  the  result  of  certain  social  institutions, 
legal,  political,  and  industrial.  Such  readers  are  sceptical 
of  all  evidence  that  conflicts  with  their  preconceived 
opinions  and  will  not  accept  it  unless  the  analysis  goes 
deep  enough  to  show  them  not  only  that  there  is  such 
evidence  but  why  there  must  be. 

§  43 .  I  propose  to  carry  the  analysis  deep  enough  now 
to  convince  the  most  sceptical  that  a  positive  rate  of 
interest  is  inevitable.  To  do  this  most  conveniently 
I  must  represent  the  factors  involved  by  the  symbols 
of  algebra  instead  of  by  those  of  geometry. 

Suppose  the  services  advanced  are  designated  a  and 
the  subjective  factor  of  value,  on  the  part  of  the  market, 
cooperating  with  a  is  designated  b.  Then  the  market 
value  of  those  services  at  the  time  they  are  ad- 
vanced is  ab.  In  accordance  with  the  definition  of 
the  principal  that  conforms  to  the  conception  of  it  uni- 
versally held  —  see  ^[4  of  §  8,  §  14,  and  §  30  —  the 


74  A  THEORY  OF  INTEREST 

principal  of  the  later  time  must  be  services  equal  to  ab 
in  nominal  value.  If,  therefore,  we  designate  the  ser- 
vices themselves  that  constitute  the  principal  of  the  later 
time  as  a',  and  the  subjective  factor  of  value  of  the 
market  of  that  time  as  bf,  the  definition  of  the  principal 
is  expressed  by  the  equation 

ab  =  a'b'. 

Now  let  us  make  an  algebraic  equation  of  the  equality 
of  the  estimated  cost  and  the  estimated  value,  to  any 
advancer  at  the  margin  of  his  advancing,  of  an  additional 
increment  of  advances  to  nature.  (That  this  equality 
must  exist  at  the  margin  of  any  advancer  is  clear  from 
the  sixth  sentence  of  §  39  and  the  fifth  and  sixth  of  the 
second  paragraph  of  §  25.)  If  we  represent  his  subjec- 
tive factor  of  value  at  the  earlier  time  by  b"  and  his 
subjective  factor  of  value  at  the  later  time  by  b'",  the 
estimated  cost  to  him  of  the  supposed  additional  advance 
must  be  any  difference  there  may  be  between  ab"  and 
a'b'" ;  that  is,  it  must  be  ab"  -  a'b'".  As  for  the  esti- 
mated value  of  the  advance  to  him,  that  we  can  express 
by  the  product  of  b'",  his  subjective  factor  of  value  at 
the  later  time,  and  a  symbol,  say  a",  representing  the 
objective  factor  of  that  value,  that  is,  the  concrete  ser- 
vices he  may  conceivably  receive,  over  and  above  those 
constituting  the  principal,  on  account  of  having  made 
the  advance  to  nature  in  question.  Then  the  equality 
of  the  estimated  cost  and  the  estimated  value  of  an 
additional  advance,  to  any  advancer  at  his  margin,  is 
expressed  by  the  equation, 


INTEREST  AS  A  PRICE  75 

i 

Take  now  the  fact,  proved  true  but  unaccounted  for 
in  §  39  and  §  42,  that  both  the  estimated  cost  and  the 
estimated  value,  to  any  advancer,  of  an  advance  at  his 
margin  must  be  positive.  That  fact  may  be  expressed 
algebraically  thus : 

ab"  -a'b"f>*o 
or  a"b'"  >  o. 

We  now  have  before  us  in  convenient  algebraic  form 
the  data  necessary  really  to  solve  the  problem  of  interest. 
The  data  consist  of  the  three  principles : 

(1)  ab  =  a'b' 

(2)  ab"  -  a'b"'  =  a"b'" 

(3)  a"b'"(or  ab"  -  a'b'"}  >  o. 

From  these  propositions  we  may  derive  a  fourth,  namely, 

(4)  b^_'b_ 
b"'  >  b' 

§  44.  In  the  meaning  of  these  four  propositions  are 
to  be  discovered  the  reasons  -why  a"b'"  must  be  greater 
than  zero,  the  reasons  why  interest  persists  age  after  age, 
and  also  the  causes  that  determine  the  normal  rate  of 
interest.  Let  us  consider  the  four  principles,  one  at  a 
time. 

The  first  is  merely  the  algebraic  expression  of  the  defini- 
tion I  gave  to  the  ''principal"  of  an  advance.  But  remem- 
ber that  that  definition  was  not  arbitrary  :  it  conformed 

*  For  the  benefit  of  readers  not  familiar  with  the  signs  used  in  alge- 
bra I  will  say  that  this  sign  means  is  greater  than.  The  whole  expres- 
sion means,  then,  simply  that  the  excess  of  ab"  over  a'  b'"  is  greater 
than  o. 


76  A  THEORY  OF  INTEREST 

to  the  conception  which  every  reader  will  admit,  I  think, 
that  he  himself  holds.  And  it  is  profoundly  significant 
for  the  theory  of  interest.  For  it  is  not  too  much  to  say 
that  if  men  conceived  the  services  of  different  times  that 
are  to  be  regarded  as  the  unit  of  an  advance,  that  is, 
if  they  conceived  the  principal,  in  terms  of  equality  to 
the  advancer  instead  of  in  terms  of  equality  to  the  market 
of  the  passing  time,  that  is,  if  they  conceived  it  in  terms  of 
equality  in  value  to  the  advancer  instead  of  in  terms  of 
equality  in  nominal  value,  the  phenomenon  we  know  as 
interest  would  not  appear  at  all.  The  services  of  the 
later  time  that  are  equal  to  the  services  a  in  estimated 
value  to  the  advancer  are  the  services  a'  -f-  a".  Sup- 
pose, then,  that  a'  -\-  a"  were  regarded  as  the  principal 
of  the  later  time.  In  that  case  no  surplus  services  called 
interest  would  have  to  be  thrown  in  to  boot  with  those 
in  that  case  regarded  as  the  principal  of  the  later  time, 
to  establish  that  equality  between  the  cost  and  the  value 
of  the  advance  to  the  advancer  which  must  normally 
exist  at  the  margin  of  any  advancer ;  and  indeed  not  so 
much  as  the  conception  of  the  surplus  called  interest 
would  ever  enter  anybody's  mind.  Now  adopt  again 
that  conception  of  the  principal  which  is  actually  held 
by  men,  that  of  services  constant  in  nominal  value,  that 
is,  constant  in  value  to  the  market  of  the  kaleidoscopic 
society  that  changes  with  each  moment  of  the  passing 
time.  Once  that  conception  of  the  principal  is  held 
again,  the  surplus  again  emerges ;  for  with  that  concep- 
tion, as  we  have  seen,  though  for  reasons  not  quite  yet 
explained,  a"b'"  must  be  greater  than  zero,  —  which 
means  that  the  advancer  must  receive  certain  services, 


INTEREST  AS  A   PRICE  77 

a",  over  and  above  the  services  a'  that  constitute  the 
principal  of  the  later  time. 

The  second  of  our  four  propositions  is  bound  up  with 
the  first  one  by  being  expressed  in  terms  whose  mathe- 
matical values  are  determined  by  the  first  one.  In 
other  words  the  a  and  a'  of  the  second  proposition  stand 
for  two  lots  of  services  which  happen  to  be  equal  in  nomi- 
nal value,  according  to  the  equation  ab  =  a'b' ;  and  the 
a"  of  the  second  proposition  stands  for  a  lot  of  services 
that  has  to  be  added  to  the  lot  a'  to  make  a  lot,  a'  +  a", 
equal,  in  estimated  value  to  the  advancer  at  his  margin 
of  advancing,  to  the  lot  a. 

The  third  proposition,  which  is  also  expressed  in  terms 
of  a,  a',  and  a",  is  based  partly  on  the  second  proposition 
and  partly  on  the  first  paragraph  of  §  42.  It  expresses 
the  fact  that  at  the  margin  of  advancing  of  any  advancer, 
an  advance,  defined  as  to  principal  as  it  always  is,  must 
have  positive  value  to  him  and  positive  cost  to  him. 

The  fourth  proposition  was  derived,  as  I  have  said, 
from  the  other  three.  I  now  ask  the  reader's  attention 
to  its  meaning.  It  is  to  be  recalled  that  b'"  stands  for 
the  estimated  subjective  factor  of  value  of  the  advancer 
in  connection  with  services  of  the  later  time,  that  b" 
stands  for  his  subjective  factor  of  value  in  connection 
with  services  of  the  earlier  time,  that  b'  stands  for  the 
changing  society's  or  market's  estimated  subjective  fac- 
tor in  connection  with  services  of  the  later  time,  and  that 
b  stands  for  the  changing  society's  or  market's  subjective 
factor  in  connection  with  services  of  the  earlier  time. 
Expressed  in  language,  then,  the  fourth  proposition 
means  that  with  the  passing  of  time  the  subjective  factor 


78  A  THEORY  OF  INTEREST 

of  any  advancer  must  in  his  estimation  decline  relatively  to 
that  of  the  changing  society. 

§45.  This  proposition,  which  we  have  derived  by 
algebraic  processes  from  three  others  that  were  them- 
selves based  on  somewhat  extended  argument,  can  for- 
tunately be  confirmed  directly  by  common  sense.  The 
b"  and  b'"  of  the  fourth  proposition  stand,  remember,  for 
the  advancer's  present  subjective  factor  and  estimated 
future  subjective  factor  respectively,  and  the  b  and  the 
b'  for  the  changing  society's  present  subjective  factor 
and  estimated  future  subjective  factor  respectively. 
The  meaning,  then  —  to  repeat  the  point  —  of  the  prop- 

Tf/  J 

osition  expressed  algebraically  by  the  inequality  —  >  — 

must  be  that  with  the  passing  of  time  the  subjective 
factor  of  any  advancer  must  in  his  estimation  decline 
relatively  to  that  of  the  changing  society.  Well,  then, 
the  question  now  before  us  is  whether  that  can  be  shown 
to  be  true  by  evidence  wholly  independent  of  the  reason- 
ing by  which  we  arrived  at  the  algebraic  expression 
of  it  ?  It  can.  It  must  be  true  if  causes  exist  that  would 
be  sure  to  produce  it  as  their  effect.  And  such  causes 
do  exist.  What  would  such  causes  be  ?  Obviously  any 
conditions  that  would  generally  be  expected  to  affect 
the  advancer's  subjective  factor  with  the  passing  of  time, 
in  the  direction  of  reducing  it,  without  affecting  the  chang- 
ing society's  subjective  factor  in  the  same  way  to  the 
same  extent.  Now  at  last  we  are  driving  our  quarry  to 
its  last  hiding  place :  we  see  now  that  if  there  are  condi- 
tions that  may  be  expected  to  make  the  advancer's  sub- 
jective factor  of  value  decline  with  the  passing  of  time, 


INTEREST  AS  A  PRICE  79 

relatively  to  that  of  the  changing  society,  those  condi- 

V 

b' 


tions  may  account  for  the  fact  that  — -  is  greater  than 


•L 

—  and  therefore  for  the  persistence  of  the  nominal  surplus 

a"  as  a  positive  quantity  of  services.  Are  there,  then, 
such  conditions  ?  Yes,  there  are :  aside  from  the  con- 
ditions connected  with  the  passing  of  time  that  may  affect 
both  the  advancer's  subjective  factor  and  the  changing 
society's  equally,  there  are  some  involved  in  the  ad- 
vancer's aging  and  death  that  affect  the  advancer's  sub- 
jective factor,  in  the  direction  of  reducing  it,  without 
affecting  the  changing  society's  at  all.  Is  not  the  chang- 
ing society  expected  to  live  on  indefinitely  ?  And  is  not 
the  advancer  —  whether  one  person,  or  a  hundred,  or 
all  the  persons  of  a  specified  time's  market  —  expected 
to  grow  old  and  die  ? 

This  explanation  may  be  defended  under  two  headings. 

First,  the  certainty  of  the  advancer's  own  death  within 
a  few  decades  —  whether  the  advancer  be  a  person,  a 
married  couple,  or  any  other  group  of  individuals  — 

and  the  chance  of  his  death  within  any  period,  however 

•i  in 

short,  makes  —  less,  quite  apart  from  any  error  of  esti- 
mate, than  — .     For  it  lowers  b'"  relatively  to  b"  without 
b 

correspondingly  lowering  b'  relatively  to  b.  It  lowers 
b'"  relatively  to  b"  because  death  removes  altogether 
the  advancer's  own  subjective  factor  for  the  later  time 
and  does  not  supplant  it  with  any  subjective  factor 
virtually  his  own  of  equal  magnitude.  By  "subjective 
factor  virtually  his  own"  I  mean  that  of  heirs  he  may 


80  A  THEORY  OF  INTEREST 

have  whose  pleasure  he  may  regard,  at  the  time  of  the 
proposed  advance  in  question,  as  in  a  sense  his  own. 
Not  every  person,  of  course,  has  heirs  for  whom  he  has 
such  feelings.  And  even  in  the  case  of  those  who  do 
have  them,  the  heirs'  subjective  factor  equals  that  of 
the  advancer  in  magnitude  only  for  services  advanced 
for  the  benefit  of  the  heirs  up  to  a  certain  point,  namely 
the  point  where  another  unit  of  services  advanced  would 
mean  less  pleasure  to  the  heirs  at  the  later  time  than 
services  objectively  the  same  would  mean  to  the  advancer 
at  the  earlier  time.  How  soon  that  point  must  be 
reached  is  realized  when  we  consider  that  each  new 
generation  has  fresh  powers  of  production  and  of  acquisi- 
tion as  well  as  fresh  wants. 

Take,  for  example,  the  healthy,  nearly  grown,  and 
fairly  well  educated  children  of  an  artisan  whose  income, 
derived  from  his  labor  only,  is  fifteen  dollars  a  week. 
Even  in  the  case  of  the  fifteenth  dollar  per  week,  the 
subjective  factor  of  such  children  several  years  hence  is 
probably  lower  than  that  of  the  artisan  and  his  wife 
themselves  now.  It  is,  indeed,  only  in  the  case  of  heirs 
very  young  at  the  later  time  in  question  and  parents 
well  off  at  the  earlier  time  in  question  that  the  future 
subjective  factor  of  the  heirs,  even  supposing  the  pleasure 
of  the  heirs  to  be  regarded  by  the  parents  as  virtually 
their  own,  can  reasonably  be  reckoned  by  the  parents  as 
fully  supplanting  their  own  present  subjective  factor  in 
connection  with  any  services  they  think  of  advancing. 

In  passing  I  will  draw  attention  to  the  fact  that  this 
weighing  of  the  subjective  factor  of  heirs  against  that  of 
the  advancer  involves  the  comparison  of  absolute  amounts 


INTEREST  AS  A  PRICE  8 1 

of  pleasure,  which,  as  explained  in  §  19,  cannot  be  meas- 
ured exactly. 

Secondly,  the  error  of  estimation  will  not  be  denied, 
in  the  case  of  most  advancers,  to  increase  the  difference, 

7///  J/ 

for  any  period  of   time,  between— r  and  — .     On  this 

o  o 

point  I  will  not  enlarge  here  :  it  is  familiar  to  all  students 
of  economics  and  is  discussed  in  §§  68  and  79. 

We  have  seen  that  the  bearing  on  the  three  previous 
propositions  of  the  fourth,  whose  truth  is  thus  confirmed 
by  common  sense  directly,  is  that  of  an  equation  derived 
from  those  three  by  the  processes  of  algebra.  But  con- 
sider what  must  be  its  true  logical  relation  to  those 
three.  Though  formulated  by  us  later  than  the  third 
proposition,  the  fourth  is  really  the  expression  of  the 
conditions  that  are  the  causes  —  in  cooperation,  of 
course,  with  the  conditions  expressed  by  the  first  equa- 
tion and  the  second  —  of  the  results  covered  by  the 
third.  It  is  because  the  subjective  factor  of  any  ad- 
vancer must  decline,  with  the  passing  of  time,  relatively 
to  that  of  the  changing  society,  that  the  margin  of  any 
advancer,  the  point  where  a  further  advance  seems  to 
offer  him  no  advantage  on  the  whole,  is  reached  while 
a"b'"  (as  also  ab"  —  a'b'"}  is  still  greater  than  zero. 
All  the  factors  and  relations  involved  in  the  interest 
problem  are  therefore  covered  by  the  three  propositions 

(1)  ab  =  a'b' 

(2)  ab"  -  a'b'"  =  a"b'" 

(  \   b"      b 
(4)      r>' 


82  A  THEORY  OF  INTEREST 

As  proposition  (3)  of  §  43  adds  nothing  to  these  three, 
it  may,  for  most  purposes  of  our  analysis,  be  dropped 
from  the  list. 

§  46.  The  elusive  secrets  of  the  interest  problem, 
though  expressible  so  simply  in  algebraic  terms,  and 
though  expressible  clearly  also,  as  I  shall  show  in  Chapter 
V,  in  geometrical  terms,  are  hard  to  express  either  simply 
or  clearly  in  language.  To  the  expression  of  so  many 
factors  and  relations  language  is  comparatively  ill 
adapted.  I  must  try,  however,  to  explain  the  enigma 
of  interest  in  language  as  well  as  in  the  other 
media. 

§  47.  Natural  interest  is  the  price  of  an  advance  to 
nature  (in  the  case  of  an  isolated  advancer,  a  Crusoe, 
not  the  price  but  services  equal  to  the  advance  in  value  to 
the  Crusoe  —  see  the  third  paragraph  of  §  34  and  §  51), 
in  other  words  the  services  of  the  later  time  for  which  the 
advance  -will  exchange,  the  kind  and  quantity  of  these  ser- 
vices being  measured  in  terms  of  nominal  value  and  the 
advance  itself  being  defined  as  the  exchange  of  services  of 
the  earlier  time  for  those  of  the  later  time  to  the  same  nominal 
value.  Natural  interest  is  usually  measured  in  terms  of 
a  rate  or  ratio,  whose  denominator  is  the  nominal  value 
of  either  of  the  two  lots  of  services  whose  exchange  con- 
stitutes the  advance  to  nature  and  either  of  which  is 
called  the  principal,  and  whose  numerator  is  the  nominal 
value,  or  value  to  the  later  time's  market,  of  the  services 
of  the  later  time  for  which  the  advance  to  nature l  will 
exchange.  What  puzzles  people  who  reflect  about  in- 

1  Here  again  it  is  perhaps  necessary  to  caution  the  reader  that  an 
"advance  to  nature"  is  not  to  be  confused  with  the  services  advanced. 


INTEREST  AS  A  PRICE  83 

terest  is  why  an  advance  to  nature  should  persist  in 
commanding  any  price  at  all  above  zero.  "  With  every- 
thing except  advances,"  people  say,  "the  price  corre- 
sponds to  the  value  to  the  producer;  and  that  falls, 
under  normal  conditions,  to  equality  with  the  cost  to 
the  producer.  Why  should  not  the  same  hold  true  of 
the  price  of  advances  to  nature  ?  And  if  it  does  hold 
true  of  them,  why  should  not  the  price  of  such  advances 
fall  to  zero,  an  advance  being  nothing  but  the  exchange 
of  services  of  one  time  for  services  of  a  later  time  to  the 
same  value?" 

We  are  now  in  a  position  to  see  how  this  difficulty 
arises.  An  advance  to  nature  is,  indeed,  "nothing  but 
the  exchange  of  services  of  one  time  for  services  of  a 
later  time  to  the  same  value."  But  to  the  same  value 
to  whom  ?  It  is  only  when  we  ask  that  question,  answer 
it  right,  and  analyze  all  that  the  answer  involves,  that 
we  are  in  the  way  of  solving  the  problem.  The  services 
of  the  later  time  are  of  the  same  value  as  those  of  the 
earlier  time  to  the  kaleidoscopic  procession  we  call  the 
changing  society.  The  definition  of  the  principal  on  this 
basis  has  been  defended  in  §§  14,  30,  and  34  (If  3) ;  now 
we  must  analyze  its  significance.  It  fixes  at  once  the 
services  of  the  later  time  (the  services  a'}  which  are  to 
be  considered  the  later  principal  as  services  having  a 

nominal  value  equal  to  77,  and  therefore  as  objectively 

less,  that  is,  less  in  quantity  or  of  a  kind  standing  lower 
in  the  series  explained  in  §  40  (^[  2),  than  those  services 
of  the  later  time  that  are  equal  to  the  services  advanced 
in  estimated  value  to  the  advancer  at  his  margin.  Why  ? 


84  A   THEORY  OF  INTEREST 

Because  it  fixes  a'  as  equal  to  a  multiplied  by  j-, ,  whereas 

the  services  of  the  later  time  that  are  equal  to  the  services 

advanced  in  estimated  value  to  the  advancer  at  his 

-in 

margin  must  be  a  multiplied  by  7777,  a  ratio  that  we  know 

to  be  larger  than  j-r  according  to  the  fourth  proposition 

of  §  43.  The  effect  of  this  is  to  make  an  advance, 
defined  as  it  is  in  respect  to  principal,  cost  any  advancer, 
at  his  margin  and  in  his  estimation,  just  the  difference 
between  the  estimated  value  to  him  of  the  later  services 
a'  and  the  estimated  value  to  him  of  the  objectively 
greater  lot  of  services  necessary  to  be  equal  to  the  services 
a  in  estimated  value  to  him.  So  an  advance,  defined  as 
it  is,  does  have  an  estimated  cost  above  zero  to  any 
advancer  at  his  margin;  and  any  advancer  will  cease 
making  advances  at  the  point  where  this  estimated  cost 
to  him  of  an  advance  as  thus  defined  equals  the  estimated 
value  to  him  of  an  advance  as  thus  defined,  in  other 
words  where  he  can  get  in  exchange  for  the  services  a 
of  the  earlier  time  not  only  services  of  the  later  time  of 
the  kind  and  amount  a'  but  also  additional  services  of 
that  time,  a",  of  such  kind  and  amount  as  to  make 
(a1  -\-  a")b'"  equal  to  ab"  or  —  what  is  the  same  thing 
—  to  make  a"b'"  equal  to  ab"  —  a'b'" .  And  so,  since 
the  advancer  is  the  only  possible  producer  or  supplier 
of  advances  to  nature,  his  cessation  of  advancing  at  that 
point  must  make  the  lot  of  later  services,  a",  which  is 
additional  to  the  lot  a'  and  therefore  called  a  surplus  in 
spite  of  the  fact  that  it  is  not  a  surplus  at  all  from  the 


INTEREST  AS  A  PRICE  85 

point  of  view  of  the  advancer  at  his  margin,  persist  age 
after  age  as  a  positive  quantity  of  services.  Finally,  so 
long  as  the  objective  surplus  services  a"  persist,  so  long 
their  (estimated)  value  to  the  society  of  their  time,  a"bf, 
by  which  men  measure  the  price  of  the  advance,  which 
is  interest,  must  persist  as  a  positive  quantity ;  and  so 
long  the  ratio  of  a"b'  to  the  nominal  value  (ab  or  a'b'} 
of  the  principal  (a  and  a'}  must  persist  as  a  positive 

a"b' 
quantity.     And  that  ratio,  — j- ,  as  was  explained  in  the 

second  paragraph  of  this  section,  is  the  rate  of  in- 
terest. 

§  48.  Since  a'  and  a"  are  determined,  relatively  to  a, 
by  the  subjective  factors,  b,  b',  b",  and  b'",  it  is  possible 
to  deduce  from  the  three  propositions  of  §  45  formulae 
for  the  amount  of  natural  interest  and  the  rate  of  natural 
interest  that  contain  only  one  objective  factor.  These 
formulas  are  derived  from  the  three  propositions  of  §  45, 
of  course,  by  the  ordinary  processes  of  elementary  algebra. 
They  are  as  follows :  — 

a"b',  the  measure  in  terms  of  nominal  value  of  the 

interest,  must  always  be  ab  ( — —  —  i  j 

— ,  the  rate  of  interest,  must  always  be  — 777—1- 
ab  bo 

And  from  these  two  propositions  it  follows  that  when  ab 
is  100,  as  it  is  in  the  case  of  an  advance  to  nature  such 
as  would  be  represented  by  Figure  II  of  §  30,  the  con- 

(T/l//  \ 

— ——  i ),  must 
bb          J 

be  also  the  rate  of  interest  per  cent.     In  other  words  the 


86  A  THEORY  OF  INTEREST 

rate  of  interest  per  cent l  must  be 

100  (P-1) 

§  49.  Discount  is  merely  interest  from  a  different 
point  of  view.  When  we  speak  from  the  point  of  view 
of  the  principal  of  an  advance  —  for  instance  from  that, 
in  our  example,  of  the  8  suits  in  1912,  the  9  suits  in  1913, 
or  the  $100  at  either  time  —  we  use  the  word  interest: 
"  A  loan,"  we  say,  "  of  $1000  should  now  yield  $50  a 
year  interest."  When,  on  the  other  hand,  we  speak  from 
the  point  of  view  of  the  principal  plus  the  interest  — 
both  of  the  later  time  in  question  —  we  use  the  word 
discount :  "  $1000  due  a  year  hence,"  we  say,  "  can 
be  bought  at  a  discount  now  for  $952.38+."  In  this 
latter  case  the  principal  of  the  advance  in  question  is 
$952.38*,  and  the  interest  on  that  principal  is  $47.619*. 
What  we  have  in  mind,  however,  in  this  case,  is  not  the 
principal  but  the  principal  plus  the  interest,  both  of  the 
later  time,  that  is,  the  $1000  of  next  year  that  is  to  be 
"  discounted." 

In  terms  of  the  case  represented  by  Diagram  III  of 
§  52,  the  interest  was  iVo  °f  a  suit  of  clothes  (see  H  2  of 
§30),  or  -jfo"  of  the  principal  of  the  later  time,  or  -j|7 
of  $100,  or  $3.2  The  conditions  of  the  market  for  ad- 

1  By  "rate  of  interest  per  cent"  I  mean  the  "6"  of  the  expression 
*'6%,"  the  "4"  of  the  expression  "4%,"  etc.  In  the  case  considered, 


then,  100  (77777—  l]  is  3,  not  T^  or  3%. 
\ob"         I 


2  This  may  puzzle  the  reader  if  he  forgets  that  each  suit  is  worth  at 
the  later  time,  according  to  our  supposition,  $11^.  —  If  one  suit  is  worth 
$11$,  then  ffo  of  a  suit  is  worth  $3. 


INTEREST  AS  A  PRICE  87 

vances  remaining  the  same,  the  discount  on  the  QjVo 
suits  of  1913  (equivalent  to  $103),  to  be  delivered  in 
1913  but  to  be  paid  for  in  1912,  would  be  yVfr  °f  a  suit 
in  1913  (equivalent  to  $3),  the  principal  advanced  in 
that  case  being  8  suits  in  1912  and  9  suits  in  1913  (either 
lot  equivalent  to  $100) ;  and  the  discount  on  9  suits 
in  1913  (equivalent  to  $100),  to  be  delivered  in  1913  but 
to  be  paid  for  in  1912,  would  be  yVg-  of  a  suit  in  1913 
(equivalent  to  $2^3),  the  principal  advanced  in  that 
case  being  a  trifle  more  than  7iV6o  suits  in  1912  and  a 
trifle  more  than  Sy7^  suits  in  1913  (equivalent  to 

$97dhr). 

§  50.     The  first  formula  for  interest  in  §  48  (namely, 

fh'h"          \ 

interest  =  ab(  ——  —  i  J  will  serve  equally  well  for  dis- 
count, of  course ;  but  in  applying  it  one  must  not  for- 
get that  the  symbol  a  in  it  means  the  services  of  the 
earlier  time  which  are  the  principal  of  the  loan,  and 
that  it  does  not  mean  the  services  of  the  later  time, 
principal  and  interest  together,  which  are  being  "  dis- 
counted." As  for  the  second  and  third  formulae  of  §  48, 
namely  that  for  the  rate  of  interest  and  that  for  the 
rate  of  interest  per  cent,  they  also  would  serve  for  dis- 
count too  if  the  rate  of  discount  were  defined  as  the 
ratio  of  the  nominal  value  of  the  discount  to  that  of 
the  principal,  not  as 'the  ratio  of  the  nominal  value  of 
the  discount  to  that  of  the  services  discounted,  which 
comprise  principal  and  interest  together.  As  the  con- 
ception of  a  rate  of  discount,  however,  is  not  common 
or  clearly  defined  among  men  of  business,  it  is  not  worth 
while  for  us  to  concern  ourselves  with  it  further. 


88  A   THEORY   OF  INTEREST 

§  51.  We  have  now  to  take  account  of  the  case  (re- 
ferred to  in  §  34)  of  an  advance  to  nature  made  —  if 
such  a  thing  is  conceivable  —  by  a  person  like  Crusoe 
who  has  no  access  to  any  market  for  services.  Such  a 
person  cannot  make  an  advance  to  nature  of  services 
defined  as  to  principal  in  terms  of  nominal  value,  for  the 
obvious  reason  that  the  services  of  his  world  have  no 
nominal  value  at  all,  that  is,  no  value  to  the  "changing 
market  of  the  passing  time."  And  yet  advances  to 
nature  are  certainly  possible  to  such  a  person,  and  ra- 
tional too ;  for  what  but  such  an  advance  would  be  the 
quite  rational  building  of  a  hut,  at  a  cost  in  labor  much 
greater  than  would  be  cancelled  by  the  value  of  its  ser- 
vices until  a  considerable  time  had  elapsed,  provided  only 
its  services  promised  to  outweigh  its  cost  eventually? 
How,  then,  are  we  to  define  the  principal  of  such  an  ad- 
vance in  Crusoe's  case  ? 

When  Crusoe  considers  the  question  of  undergoing 
painful  labor  for  the  sake  of  pleasure  to  follow  immedi- 
ately, he  is  guided  to  his  decision  by  the  same  simple  prin- 
ciple that  guides  a  man  in  touch  with  a  market,  the  prin- 
ciple explained  in  the  fifth  paragraph  of  §  10  and  in  §  16. 
And  when  he  considers  the  question  of  undergoing  pain- 
ful labor  for  the  sake  of  pleasure  to  follow  considerably 
later,  he  is  guided  to  his  decision,  again,  by  the  same  com- 
parison —  that  is,  of  the  pleasure  dependent  on  the  labor 
with  the  pain  on  which  the  labor  depends — which  guides 
a  man  in  society.  But  whereas  the  man  in  society  con- 
siders to  be  principal,  as  distinguished  from  "surplus" 
or  "interest,"  so  much,  of  the  services  of  the  later  time 
that  he  is  to  get  in  exchange  for  those  of  the  earlier  time, 


INTEREST  AS  A   PRICE  89 

as  are  equal  to  those  of  the  earlier  time  in  nominal 
value,  a  Crusoe  does  not  find  any  part  of  the  later  ser- 
vices marked  off  thus  from  the  rest  as  principal.  For 
in  his  world  there  is  no  such  equation  as  ab  =  a'b'  (see 
the  second  paragraph  of  §  43) ;  and  for  him  the  equation 
ab"  -  a'b'"  =  a"b'"  of  the  world  of  the  market  be- 
comes ab"  —  ab'"  =  a"b'" .  As  b  and  b'  do  not  exist  in 
his  world,  the  services  of  the  later  time  in  his  world  that 
correspond  to  the  services  a'  in  the  world  of  the  market, 
that  is,  the  services  that  constitute  the  principal  of  the 
later  time,  are  services  equal  to  the  services  a,  when  con- 
temporary with  a,  in  value  to  Crusoe  himself;  and  the 
formula  for  the  rate  of  interest  with  Crusoe  becomes 

b"  .  ,  b'b" 

—  -  i  instead  of  —  --  I. 


CHAPTER  V 

RELATIONS  OF  THE  INTEREST  PROBLEM  REPRESENTED 
GEOMETRICALLY 

§  52.  As  I  have  said,  the  relations  of  the  many  factors 
involved  in  our  problem  are  hard  to  explain  clearly  by 
means  of  language  only.  They  can  be  dealt  with  most 
conveniently  in  the  symbols  of  algebra,  to  which  there- 
fore I  have  had  recourse.  Many  minds,  however,  in- 
cluding my  own,  are  not  quite  satisfied  with  their  grasp 
of  such  relations  until  they  have  visualized  them  in  terms 
of  relations  in  space.  For  many  of  us,  therefore,  it  is 
fortunate  that  the  relations  involved  in  the  interest 
problem  can  be  represented  geometrically. 

§  53.  It  is  to  be  especially  noted  that  the  pairs  of 
curves  which  in  Diagram  III  below  coincide  at  G,  O,  X, 
E,  L,  and  U  are  not  the  same  curves  we  had  in  Diagram 
II  (§41),  which  bound  the  estimated  cost  and  the  esti- 
mated value  of  the  various  units  of  advances  (to  nature) , 
but  those  we  had  in  Diagram  I  (§  25),  which  bound  the 
same  factor-lines  in  the  case  of  services. 

In  Diagram  I  we  represented  the  cost  or  the  value  of 
any  unit  of  services  by  a  mere  line  instead  of  by  an  area 
because  we  assumed  the  unit  of  services  whose  cost  or 
value  was  in  question  to  be  infinitesimal  in  size.  In  our 
present  diagram,  however,  Diagram  III,  the  marginal 
unit  of  services  considered  is  in  every  case  one  of  appre- 

9o 


RELATIONS  OF  THE  INTEREST  PROBLEM 


ciable  size,  so  that  its  cost  and  its  value  —  which  are 
equal,1  of  course,  since  we  are  at  the  margin  —  will  have 
to  be  represented  by  an  area  instead  of  by  a  line. 

Since  the  curves  bounding  the  cost  and  the  value  of 
various  units  of  the  supply  of  services  coincide  theoreti- 


Numerical  equivalents,  according 
to  the  case  used  as  an  example  in 
the  text,  of  the  lines  and  rectangles 
of  1912-1913. 

b=12\ 

a' =g 


a'b'" '==  i 

ab"  =  50 
a"b'"  =  ijVj 


G 

s              / 

H  /     ,'" 

S                               f 

E 

b" 

1912 

/ 
/ 

F           / 

s 

/ 

/ 

Numerical  equivalents  of  the   lines 
and  rectangles  of  1914. 

a'"  =  858,  a'"b'""  =  48^3 

a""  =  &  a""b""  —  3 


The  capital  letters  indicate  points.  The  small  italics  indicate  lines  corresponding  to  the 
factors  designated  by  the  same  symbols  in  the  algebraic  sections  of  Chapter  IV.  Thus  b" 
is  the  line  EC ;  b  is  the  line  GC ;  d  is  the  line  IJ,  etc. 

DIAGRAM  III 

cally  at  only  a  single  point,  as  in  Diagram  I  (§  25),  we 
ought  theoretically  to  represent  the  cost  and  the  value 
of  a  unit  of  services  of  appreciable  size  by  two  different 
areas  such  as  the  shaded  areas  of  Figure  I  and  Figure  II 
below  respectively.  For  the  study  of  our  particular 
problem,  however,  it  will  do  no  harm  to  represent  the 

1  Except,  of  course,  for  the  slight  difference  suggested  in  the  following 
paragraph. 


92 


A  THEORY  OF  INTEREST 


curves  as  coinciding  in  a  horizontal  line  long  enough  to 
bound  the  top  of  the  shaded  areas  representing  respec- 
tively the  cost  and  the  value  of  the  marginal  unit  of  the 
services  in  question,  so  that  the  area  becomes  a  rectangle. 
The  assumption  involved  in  doing  this  is,  of  course, 
merely  that  the  cost  and  the  value  of  the  infinitesimal 
unit  at  the  very  margin  hold  true  also  of  all  parts  of  a 
unit  of  appreciable  size.  For  example,  the  assumption 
is  that  in  the  case  of  the  advance  to  nature  of  the  ser- 
vices required  to  produce  eight  suits  of  clothes  having 
a  market  price  of  $12.50  each,  the  cost  and  the  value 


FIGURE  I 


FIGURE 


of  the  infinitesimal  unit  of  these  services  at  the  very 
margin  holds  true  of  all  the  other  units  of  them ;  and 
no  one  will  contend  that  the  error  of  such  an  assumption 
can  lead  us  astray  in  respect  to  the  main  factors  of  the 
interest  problem. 

The  base-lines  of  Diagram  III  are  those  of  three  suc- 
cessive years,  1912, 1913,  and  1914,  as  marked.  For  the 
illustration  of  the  main  factors  of  the  problem  the  part 
of  the  diagram  covering  1912  and  1913  is  sufficient; 
but  the  part  covering  a  third  year  is  added  to  illustrate 
the  factors  involved  in  the  compounding  of  interest, 
which  we  shall  consider  in  §  59  below. 

§  54.     The  diagram  illustrates  the  case  of  the  advance 


RELATIONS  OF  THE  INTEREST  PROBLEM    93 

to  nature  involved  in  locking  up  in  the  storehouse  of  na- 
ture's causal  nexus  the  services  required  to  make  eight 
suits  of  clothes,  each  having  a  market  value  corresponding 
to  the  price  $12.50.  It  is  drawn  to  scale,  each  objective 
unit  being  represented  by  a  sixteenth  of  an  inch  laid 
off  across  the  page  from  left  to  right,  as  from  C  towards 
D  or  from  7  towards  /,  and  each  subjective  unit  being 
represented  by  a  sixteenth  of  an  inch  laid  off  up  the  page, 
as  from  C  towards  G  or  from  /  towards  O.  Of  the  two 
curves  coinciding  from  E  to  F,  the  lower  bounds  the  cost 
to  the  advancer  l  of  successive  increments  of  the  ser- 
vices of  1912,  the  advance  of  which  is  illustrated  by  the 
diagram  covering  the  two  years;  the  upper  bounds  the 
value  to  him  ditto.  Of  the  two  curves  at  G,  on  the  other 
hand,  the  lower  bounds  the  cost  to  the  market  of  1912 
ditto,  and  the  upper  the  value  to  the  market  of  1912 
ditto.  The  pairs  at  L  and  O  are  the  corresponding  curves 
for  the  year  1913 ;  but  note  that  though  the  person  for 
the  curves  at  L  is  the  same  advancer  we  had  for  the 
curves  at  E,  that  is,  any  advancer  of  1912  who  at  his 
margin  is  considering  advancing  the  services  CD  to  nature 
for  one  year,  the  market  for  the  curves  at  O  is  not  the 
same  market  we  had  at  G  but  the  market  of  1913. 

The  services  advanced  —  or  whose  advance  is  under 
consideration  —  are,  as  I  have  said,  those  required  to 
make  eight  suits  each  having  in  1912  a  market  value 
corresponding  to  the  price  $12.50.  They  are  measured 

1 1  mean  either  the  actual  or  the  potential  advancer  according  to 
whether  he  actually  decides  to  advance  the  services  or  not.  As  we  are 
considering  the  situation  when  he  has  reached  the  margin  of  his  advanc- 
ing, we  must  admit  that  he  is  just  as  likely  barely  to  fail  to  make  the 
advance  as  barely  to  make  it. 


94  A  THEORY  OF  INTEREST 

objectively  by  the  line  CD,  also  designated  simply  a, 
which  is  a  very  small  part  of  the  base-line,  LI,  of  Diagram 
I  (§  25) — m  fact  the  infinitesimal  part  at  the  point  V 
of  that  base-line  —  magnified,  as  it  were,  to  the  length 
CD.  The  value  of  these  services  to  the  market  of  1912 
is  represented  by  the  parallelogram  CDHG,  for  the  up- 
and-down  dimension  of  that  parallelogram  is  made  12^ 
sixteenths  of  an  inch  in  length  to  correspond  with  the  sub- 
jective factor  of  the  market  value  of  those  services  as  it 
is  indicated  by  the  market  value  of  each  suit,  which  cor- 
responds to  the  price  $12.50.  This  parallelogram  can  be 
referred  to  more  conveniently  as  ab,  in  which  expression 
a  stands  for  the  dimension  CD,  the  objective  factor  of 
the  value  in  question,  and  b  for  the  dimension  CG,  the 
subjective  factor  of  the  same  value.  The  value  of  the 
same  services,  the  services  a,  to  the  advancer,  may  differ 
from  ab,  of  course,  according  to  the  difference  between 
his  personal  subjective  factor  and  b.  If  his  personal  sub- 
jective factor,  which  we  shall  call  b",  happens  to  be  half 
that  of  the  society  of  1912,  we  must  make  b"  half  as  long 
as  b,  as  is  done  in  the  diagram.  These  subjective  factors 
are  chosen  at  random :  any  others  would  serve  equally 
well. 

Now  consider  the  conditions  just  one  year  later,  in 
1913.  The  objective  measure  of  the  services  required 
at  that  time  to  have  an  estimated  value  to  the  market 
of  that  time  —  in  other  words  an  estimated  nominal 
value  —  equal  to  ab  will  depend  on  what  the  estimated 
subjective  factor  of  the  society  of  that  time  happens  to  be. 
If  that  estimated  subjective  factor,  which  we  shall  desig- 
nate b',  happens  to  be  u^,  the  objective  measure  of  the 


RELATIONS  OF  THE  INTEREST  PROBLEM          95 

services,  yielded  by  the  suits  in  1913,  that  equal  in  nomi- 
nal value  the  services  a  invested  in  making  them  in  1912, 
must  be  9  units ;  for  9  times  n^  equals  8  times  12^.  As 
this  .numerical  equivalent  is  assumed  for  the  case  illus- 
trated, the  line  b'  (or  IO)  of  the  diagram  is  given  a  length 
of  n^  sixteenths  of  an  inch. 

We  now  have  a  geometrical  representation  of  the  equa- 
tion of  the  nominal  value  of  the  two  lots  of  services  that 
constitute,  according  to  the  definition  of  the  principal 
always  implied,  though  not  clearly  formulated,  in  men's 
thinking,  the  principal  of  the  advance  to  nature  we  are 
analyzing;  for  the  parallelogram  a'b',  which  represents 
the  nominal  value  of  the  services  that  constitute  the  prin- 
cipal of  1913,  is  exactly  equal  in  area  to  the  parallelogram 
ab,  which  represents  the  nominal  value  of  the  services 
that  constitute  the  principal  of  1912. 

§  55.  The  estimated  value  to  the  advancer  of  the  prin- 
cipal of  1913,  that  is,  of  the  services  a',  is  the  next  thing 
to  be  represented.  It  is  determined,  of  course,  by  the 
estimated  subjective  factor  of  the  advancer  for  1913. 
What,  then,  is  that  subjective  factor?  All  we  know  is 
that  it  must  be  less  relatively  to  b"  than  is  b'  relatively 
to  b.  The  smaller  we  make  b"r,  the  greater  will  the 
difference  be  between  ab"  and  a'b'",  the  greater  the  a"b"f 
which  must  equal  that  difference,  and  the  greater  the 
a"b'  which  measures  the  natural  interest  in  the  case. 
As  we  must  assume  a  magnitude  for  b'",  let  us  assume  one 
for  it  such  that  our  diagram  will  represent  conditions 
about  the  same  as  those  of  the  commercial  centres  of  the 
world  to-day,  that  is,  as  those  where  all  persons  cease 
making  further  advances  to  nature  at  a  point  where  the 


96  A  THEORY  OF  INTEREST 

nominal  surplus  to  be  got  by  making  a  further  advance 
to  nature  for  one  year  —  in  other  words,  where  the  nomi- 
nal value  of  such  an  advance  —  has  fallen  to,  say,  3  % 
of  the  nominal  value  of  the  principal.  That  means  draw- 

n-ii 

ing  the  line  b'"  so  that  -    -  equals  ^f^,  or,  since  the  ab 

ab 

of  our  diagram  is  100,  so  that  a"b'  equals  3.     Well,  then, 

if  a"b'  is  to  be  3,  a"  must  be  ^7,  which  means  -^-r,  which 

b  irfr 

means  -jVo ;  and  if  a"  is  -^Q,  b'"  must,  according  to  the 
second  equation  of  §  45  (ab"  -  a'b'"  =  a"b'"),  be  sfjjf . 
The  line  b'"  (or  IV)  of  our  diagram  is  therefore  given  a 
length  of  sf  |y  sixteenths  of  an  inch.  And  so  the  rectangle 
a'b'"  represents  the  estimated  value  to  the  advancer  at 
his  margin  of  the  services  a'  of  1913,  which  constitute 
the  principal  of  the  advance  under  consideration. 

§  56.  Our  next  step  is  to  represent  in  the  diagram  the 
estimated  value  to  the  advancer  of  the  advance  itself, 
at  his  margin  of  advances.  By  this  I  do  not  mean,  re- 
member, its  estimated  net  value  to  him,  its  estimated 
value  to  him  above  its  estimated  cost  to  him.  Such  an 
estimated  net  value  to  him  above  estimated  cost  to  him 
the  advance  at  the  margin  cannot  normally  have.  I 
mean  the  estimated  value  to  him  of  the  marginal  advance 
considered  independently  of  its  possible  estimated  cost 
to  him.  To  represent  this  estimated  value  we  extend 
the  line  IJ  past  /  twenty-seven  hundredths  (^Vo)  of  a 
sixteenth  of  an  inch  and  draw  the  rectangle  having  that 
added  line  (which  we  designate  a"}  as  one  dimension  and 
b'"  as  the  other.  The  estimated  value  of  the  advance  to 
the  advancer  is  then  represented  by  the  area  of  the  rec- 


RELATIONS  OF  THE  INTEREST  PROBLEM    97 

tangle  a"b'"  (or  JKNM},  which  is  i^Vs  square  sixteenths 
of  an  inch. 

The  estimated  cost  to  the  advancer  of  the  advance, 
that  is,  its  estimated  cost  to  him  quite  independently 
of  its  estimated  value  to  him,  is  represented  on  the  dia- 
gram by  the  excess  of  the  area  of  the  parallelogram  db" 
over  that  of  the  parallelogram  a'b'" '. 

The  entire  second  equation  of  §  45,  namely  ab"  —  a'b'" 
=  a"b'" ',  is  now  represented  geometrically.  For  the 
excess  of  the  area  of  the  parallelogram  ab"  over  that  of 
the  parallelogram  a'b'"  will  be  found  to  be  precisely  equal 
to  the  area  of  the  parallelogram  a"b'" . 

§  57.  To  represent  on  our  diagram  the  nominal  value 
of  the  so-called  surplus  services  a",  which  nominal  value 
measures  the  interest  in  the  case  (the  services  them- 
selves being  the  interest  itself) ,  we  simply  draw  the  rec- 
tangle having  a"  for  one  dimension  and  b'  for  the  other, 
that  is,  the  rectangle  JKQP.  The  area  of  this  rectangle 
measures  the  nominal  value  of  the  so-called  surplus  ser- 
vices a",  which  nominal  value  measures  the  natural 
interest  normally  obtainable,  under  the  conditions  as- 
sumed, by  advancing  to  nature  for  one  year  services 
having  a  nominal  value  (represented  by  the  area  of 
CDHG,  by  that  of  IJPO,  or  by  that  of  any  parallel 
cross-section  of  the  solid  figure  between  them)  of  ab 
(which  corresponds  to  $100  in  our  example)  and  having 
an  objective  measure  in  1912  of  a  (which  corresponds  to 
eight  suits  of  clothes  in  our  example).  The  area  of  this 
rectangle  (JKQP}  is  exactly  3  square  sixteenths  of  an 
inch  (which  corresponds  to  $3  in  our  example). 

The  rate  of  interest  in  the  case  is  represented  by  the 


98  A  THEORY  OF  INTEREST 

ratio  of  the  area  a"b'  (or  JKQP)  to  the  area  ab,  to  the 
area  a'b1 ',  or  to  any  of  the  other  areas  (of  parallel  cross- 
sections  between  them)  representing  the  nominal  value 
of  the  principal.  As  the  area  ab  happens  to  be  just  100 
square  sixteenths  of  an  inch,  the  number  of  the  square 
sixteenths  of  an  inch  in  a"b',  which  is  3,  is  the  rate  per 
cent  of  interest  in  the  case. 

§  58.  The  question  may  arise  in  the  minds  of  some 
readers  whether  it  would  have  made  any  difference  if  we 
had  supposed  b"  to  be  greater  instead  of  less  than  b. 
None  at  all.  This  will  be  clear  to  anybody  who  considers 
the  significance  of  the  algebraic  solution  of  the  problem 
in  the  preceding  chapter,  or  to  anybody  who,  distrusting 
his  own  ability  to  reason  in  the  terms  of  algebra,  makes 
the  test  in  terms  of  geometry.  It  is  not  the  relation  of 


T///  If 

\  II  A        7      i       A    A-I       A        r    0          A  ,     0 


b"  to  b,  but  that  of  -—r  to  — ,  that  causes  the  persistence 
b           b 

of  interest. 

§  59.  The  compounding  of  interest  is  shown  graphi- 
cally in  Diagram  III  above  by  the  representation  of  the 
principal  of  the  advance  of  1913-1914  as  not  the  services 
a  only  but  the  services  a  plus  the  services  a" . 

Compound  interest  is  often  spoken  of  as  if  it  were  an 
unusual  and  artificial  species  of  the  genus  interest.  The 
truth  is,  however,  that  it  is  simple  interest  that  is  an  ar- 
bitrary conception  of  men's  minds,  corresponding  but 
very  imperfectly  to  any  phenomenon  discoverable  in 
nature,  and  that  the  conception  of  compound  interest 
corresponds  to  natural  conditions. 

Compound  interest  is  the  aggregate  of  the  prices  of  a 
series  of  advances.  Of  that  series  the  first  is  the  advance, 


RELATIONS  OF  THE  INTEREST  PROBLEM         99 

for  the  first  compounding  period,  of  the  services  which 
constitute  the  original  principal  in  the  case ;  the  second 
is  the  advance,  for  the  second  compounding  period,  of 
services  which  constitute  the  original  principal  (the  ser- 
vices a')  plus  services  which  constitute  the  interest  (a"} 
of  the  first  advance  ;  the  third  is  the  advance,  for  the  third 
compounding  period,  of  services  which  constitute  the 
principal  of  the  second  advance  plus  services  which  con- 
stitute the  interest  of  the  second  advance ;  and  so  on.  In 
commercial  transactions  the  length  of  the  compounding 
period  is  fixed  by  law  or  by  contract,  usually  as  six  months 
or  one  year.  Ideally,  however,  it  should  be  infinitesimal ; 
for  the  advance  of  services  for  the  least  time  conceivable 

Till  If 

has  ideally,  on  account  of  the  relation  of  —  to  —  already 

b          b 

explained,  some  nominal  value,  however  small,  and  an 
advance  for  an  appreciable  time  really  involves  the  mak- 
ing of  a  series  of  advances,  each  for  an  infinitesimal  period 
and  each  of  services  constituting  the  principal  plus  the 
interest  of  the  previous  advance  of  the  series. 

§  60.  The  question  now  arises  :  What  is  the  effect,  if 
any,  on  the  rate  of  loan  interest  of  the  customary  adop- 
tion, in  accordance  with  law  or  contract,  of  so  extended 
a  compounding  period  as  six  months  or  a  year  ?  It  is  to 
raise  that  rate,  above  what  it  would  be  if  the  compound- 
ing period  were  infinitesimal,  enough  to  make  the  return 
to  the  lender  just  what  it  would  be  if  the  compounding 
period  were  infinitesimal. 


CHAPTER  VI 

CAUSES  OF  THE  NORMAL  RATE  OF  INTEREST 

§  6 1.  Usually,  when  people  speak  or  write  of  the 
"causes  of  interest,"  they  mean  the  causes  of  a  positive 
rate,  a  rate  above  zero.  What  we  want,  however,  is 
more  than  that :  we  want  a  comprehensive  list  of  the 
causes  that  raise  and  the  causes  that  lower  the  rate. 

§  62.     In  undertaking  to  determine  these  causes  our 

b'b" 

first  thought  is  that  since  — —  —  i  is  the  formula  for  the 

h'h'f 

normal  rate  of  interest,  whatever  increases  — —  must 

bb 


raise  the  rate,  and  whatever  decreases  77^  must  lower 


w 

bb' 

the  rate.  That  is,  of  course,  true ;  but  as  a  criterion  of 
the  causes  of  effects  on  the  rate  it  is  not  nearly  so  service- 
able as  that  furnished  by  Diagram  II  (of  §  41),  in  which 
the  rate  is  represented  by  the  length  of  a  line,  WV.  The 
advantage  for  our  present  purpose  of  that  diagram,  which 
is  reproduced  with  a  slight  addition  below,  is  that  it 
reveals  the  causes  of  the  length  of  WV,  which  represents 
the  rate  of  interest,  as  divisible  into  two  groups,  those  on 
the  value  side,  as  we  may  call  them,  and  those  on  the  cost 
side.  For  the  length  of  WV  is  fully  determined  by  the 
height  above  the  base-line  of  the  point  W.  But  that 
point,  we  know,  must  be  on  both  the  curve  OR  and  the 


CAUSES  OF  THE  NORMAL  RATE  OF  INTEREST       101 


curve  CH.  So  the  conditions  or  causes  of  the  rate  WV 
must  be  susceptible  of  division  into  two  groups,  those 
that  determine  the  course  of  the  curve  OR  where  it  is  to 
cross  the  curve  CH,  and  those  that  determine  the  course 
of  the  curve  CH  where  it  is  to  cross  OR.  Nothing  can 
be  a  cause,  on  the  value  side,  of  a  rise  or  a  fall  in  the 
normal  rate  of  interest  except  a  change  of  conditions 
that  respectively  raises  or  lowers  the  curve  OR  so  as  to 
raise  or  lower  the  point  of  intersection  W ;  and  nothing 


DIAGRAM  IV 

can  be  a  cause,  on  the  cost  side,  of  a  rise  or  a  fall  in  the 
normal  rate  of  interest  except  a  change  of  conditions 
that  respectively  raises  or  lowers  the  curve  CH  so  as  to 
raise  or  lower  the  point  of  intersection  W.  All  this  will 
become  clear  as  we  proceed  to  apply  it. 

§  63.  What  possible  conditions,  then,  on  the  value 
side  might  raise  the  normal  rate  of  interest  ?  Applying 
the  criterion  derived  from  the  diagram,  we  answer : 
Any  conditions  that  change  the  course  of  OR  so  as  to 
raise  the  point  of  its  intersection  with  CH. 

Among  such  conditions,  clearly,  are  those  changes 
that  open  opportunities  for  making  advances  to  nature 
considered  better  than  those  previously  considered  mar- 


102  A  THEORY  OF  INTEREST 

ginal.  (In  this  connection  recall  §§  37-40  above,  espe- 
cially §  40.)  For  example  suppose  the  time  in  question 
to  be  that  of  the  first  successful  application  of  electricity 
to  the  propelling  of  street-cars ;  suppose  the  series  of  all 
the  natural  capitals  —  if  I  may  use  such  a  form  of 
expression  —  in  existence  and  yielding  as  much  as  the 
normal  rate  of  interest  at  the  time  to  be  represented  by 
LI ;  and  suppose  the  invention  —  as  we  call  it  —  of  the 
electric  car  to  reveal  opportunities  for  the  investment 
of  services,  up  to  an  amount  represented  objectively  by 
a  sixteenth  of  an  inch  on  LI,  in  advances  to  nature  esti- 
mated to  be  more  valuable  or  advantageous  than  those 
standing  at  the  point  V  in  the  series.  In  that  case  ser- 
vices, in  the  form  of  the  labor  of  artisans,  represented 
objectively  by  a  sixteenth  of  an  inch  on  LI,  which  would 
have  been  devoted,  if  the  invention  had  not  been  made, 
to  making  and  repairing  horse-cars  and  horse-buses,  har- 
nesses, and  various  other  sorts  of  natural  capital  now 
displaced  in  the  series,  are  now  diverted  to  producing  elec- 
tric cars  and  all  their  accessories ;  and  the  effect  of  this 
on  the  curve  OR  is  to  raise  its  course  from  that  point  — 
sayiVin  Diagram  IV  above — at  which  the  electric  cars 
and  accessories  standing  highest  take  their  place  in  the 
general  series,  on  towards  R  or  rather  towards  a  point 
somewhat  above  R.  The  dotted  line  in  Diagram  IV 
indicates  the  course  of  the  curve  after  the  supposed  effect 
of  the  invention  has  been  felt.  It  is  apparent  that  al- 
though the  conditions  determining  the  course  of  the 
curve  CH,  which  are  the  causes  of  the  rate  of  interest 
on  the  cost  side,  have  remained  unchanged,  the  point 
of  intersection  of  the  two  curves  is  no  longer  W,  but  X, 


103 

which  is  higher  than  W.  In  other  words  the  rate  of 
interest  has  been  raised.  We  may  therefore  declare, 
with  an  assurance  impossible,  as  it  seems  to  me,  to  any 
economist  hitherto,  that  inventions  may  be  causes,  on 
the  value  side,  of  a  rise  in  the  rate  of  interest. 

Discoveries,  as  of  new  lands  or  of  unknown  resources 
in  old  lands,  may  have  on  the  rate  of  interest  the  same 
effect  as  inventions,  and  for  the  same  reasons. 

So  also  may  an  extension  among  men  generally  of  the 
scientific  knowledge  already  possessed  by  a  few;  so 
may  an  increase,  on  the  part  of  laborers,  of  skill  in  the 
handling  of  machinery;  st)  may  an  increase  of  pains- 
taking in  the  handling  of  machinery;  so,  indeed,  may 
any  change  whatever  that  raises  OR  so  as  to  raise  its 
intersection  with  CH  when  the  course  of  CH  itself 
remains  unchanged. 

One  more  class  of  these  changes  that  may  raise  OR 
so  as  to  raise  its  intersection  with  CH  demands  special 
explanation.  I  refer  to  changes  that  affect  opportunities 
for  making  advantageous  advances  to  nature  of  a  sort 
seldom  recognized  as  advances  at  all.  Let  me  ex- 
plain. A  young  man  is  really  making  an  advance  to 
nature  when  he  undergoes  pain  and  expense  in  training 
himself  or  educating  himself  in  order  to  increase  the 
economic  value  of  his  services,  per  unit  of  their  cost, 
later.  Consider  the  case  of  a  lad  who  spends  money  - 
perhaps  borrowed  money  —  and  works  painfully  hard 
to  give  himself  a  medical  education.  Though  most  of 
his  expenses  are  for  board  and  lodging,  which  he  is  un- 
questionably "  consuming  "  if  a  person  ever  consumes 
anything,  those  very  "  expenses  for  consumption,"  as 


104  A  THEORY  OF  INTEREST 

well  as  his  labor  of  study  beyond  the  point  to  which  he 
would  study  for  his  immediate  pleasure,  have  in  them 
an  element  of  investment  or  of  advancement  to  nature. 
The  advice  so  often  given  to  young  men,  "  You  cannot 
invest  your  time  and  money  better  than  in  getting  a 
good  education,"  implies  —  what  is  literally  true  from  a 
strictly  economic  point  of  view  —  that  educating  one's 
self  is  making  an  investment  or  an  advance.  At  every 
point  in  the  circle,  or  rather  the  spiral,  of  economic  life 
consumption  and  investment  meet,  just  as  consumption 
and  production  meet.  The  food  and  recreation  that 
give  me  immediate  pleasure4 to  the  extent  of  50  units, 
say,  may  also  put  me  into  condition  to  produce  imme- 
diately, above  the  services  I  could  produce  without 
them  immediately  with  the  same  pain,  services  having 
a  nominal  value  of  20.  There  you  have  the  point  of 
contact  between  consumption  and  production.  But 
the  same  food  and  recreation  may  put  me  into  condi- 
tion to  produce  by  next  year,  above  the  services  I  could 
produce  without  them  immediately  with  the  same  pain, 
services  having  a  nominal  value  of  21  units.  There 
you  have  the  point  of  contact  between  consumption 
and  investment  or  advancing  (to  nature),  for  the  twenty- 
first  unit  in  this  latter  case  is  the  nominal  value  of  the 
advance  for  one  year  of  the  services,  having  a  nominal 
value  of  20  units,  which  I  might  have  consumed  at  the 
earlier  time  but  decided  to  forego  for  a  year. 

Here,  then,  to  come  back  to  our  main  line  of  thought, 
in  connection  with  consumption  itself  are  opportunities 
for  making  advances  to  nature  that  may  yield  a  nominal 
surplus :  in  the  case  supposed  just  above,  there  was  an 


CAUSES  OF  THE  NORMAL   RATE   OF  INTEREST       105 

opportunity  to  secure,  by  such  an  advance  to  nature 
in  connection  with  consumption,  natural  interest  at  the 
rate  of  5  per  cent ;  for  i  is  5  per  cent  of  20.  And  any 
changes  that  affect  these  opportunities  or  men's  knowl- 
edge of  them  must  clearly  affect  the  rate  of  natural 
interest  from  the  value  side  precisely  as  do  changes  in 
respect  to  the  other  sorts  of  opportunities  that  we 
associate  with  the  words  "  invention  "  and  "  discovery." 
The  introduction  of  the  electric  tram-car  increased  the 
value  of  advances  to  nature  embodied  in  certain  impres- 
sions, on  the  minds  of  young  engineers,  which  we  call 
knowledge  of  certain  formulae  and  principles  connected 
with  the  application  of  electricity  to  the  propulsion  of 
cars.  Therefore  the  investment  of  board-bills  and  pain- 
ful study  in  this  chapter  of  science  was  encouraged  by 
the  introduction  of  electric  cars  just  as  investment  in 
the  cars  themselves  was ;  and  the  services  of  boarding- 
house-keepers  and  printers,  that  had  formerly  been 
otherwise  applied,  were  diverted  to  the  making  of  ad- 
vances to  nature  embodied  in  the  additional  education 
of  certain  young  men.  The  finding  of  such  new  oppor- 
tunities for  making  advances  to  nature,  in  connection 
with  the  young  men's  consumption,  considered  more 
advantageous  or  valuable  than  those  previously  con- 
sidered marginal,  has  the  effect  of  raising  our  curve  OR 
from  some  such  point  as  ^V  on,  and  therefore  of  raising 
the  normal  rate  of  natural  interest. 

§  64.  I  have  now  mentioned  several  groups  of  causes, 
on  the  value  side,  of  a  rise  of  the  normal  rate  of  natural 
interest.  How  many  such  causes  are  there?  That 
depends  wholly  on  how  you  conceive  and  define  them. 


106  A  THEORY  OF  INTEREST 

If  you  conceive  and  define  them  as  one  comprehensive 
group,  they  take  on  the  appearance  of  a  single  cause : 
conceive  and  define  the  conditions  on  the  value  side  of  a 
rise  of  the  normal  rate  of  interest  as  "  all  that  increase  the 
value  of  the  marginal  advance  to  nature,"  and  you  have 
reduced  them  to  a  single  group  which  might  be  described 
as  a  single  cause.  If,  however,  you  mention  separately 
inventions,  discoveries,  and  so  forth,  as  I  have  done, 
and  then  proceed  to  break  each  one  of  these  categories 
up  into  smaller  categories  and  even  into  particular 
events,  you  are  ready  to  declare  the  causes  on  the  value 
side  of  a  rise  of  the  normal  rate  of  interest  to  be  many. 
Finally,  if  you  inquire  into  the  causes  of  the  causes, 
the  causes  of  the  causes  of  the  causes,  and  so  on  indefi- 
nitely, you  are  ready  to  say  that  the  number  of  possible 
causes  of  a  rise  of  the  normal  rate  of  interest  is  infinite. 
And  such  an  assertion  cannot  validly  be  denied.  The 
truth  is  that  the  cause  of  any  event,  the  conditions 
preceding  it  without  which  it  would  not  have  occurred, 
may  be  conceived  by  our  minds  under  the  form  of  in- 
finite multiplicity,  under  that  of  unity,  or  under  that  of 
some  intermediate  number  of  categories  or  groups ;  and 
the  only  ground  for  preferring  one  of  these  conceptions  to 
any  other  is  that  of  its  serviceability  in  that  classification 
of  events  in  our  minds  which  makes  them,  as  we  say, 
com-prehensi-ble  to  us,  that  is,  capable  of  being  grasped 
up  together.  It  is  only  because  it  helps  my  thinking  to 
do  so,  only  because  it  helps  me  to  grasp  up  together  in 
my  mind  the  relations  (of  groups  of  events)  that  I  call 
the  normal  rate  of  interest  and  the  conditions  (of  groups 
of  events)  that  must  precede  those  relations,  that  I  first 


CAUSES   OF  THE  NORMAL  RATE   OF  INTEREST       107 

divide  all  these  conditions  into  two  groups,  those  on  the 
value  side  and  those  on  the  cost  side,  then  divide  the 
former  group  again  into  those  that  raise  the  rate  and  those 
that  lower  it,  and  finally  divide  the  former  subgroup 
into  sub-subgroups  defined  by  the  use  of  such  words 
as  invention  and  discovery.  This  classification  is  im- 
mensely important  to  my  thinking;  but,  after  all,  it 
is  only  a  classification,  and  not  an  exhaustive  and  rigidly 
logical  one  at  that.  The  number  of  its  separate  groups, 
as  well  as  the  principle  of  their  demarcation,  is  not 
determined  by  the  facts  only  but  partly  also  by  the  re- 
quirements of  our  powers  of  comprehending  them. 

§  65.  The  causes,  on  the  value  side,  of  a  fall  of  the 
normal  rate  of  interest  are  simply  the  changes  of  condi- 
tions contrary  to  those  set  forth  above  as  causing  a  rise. 
By  a  change  contrary  to  an  invention  which  raises  the 
normal  rate  of  interest,  for  example,  I  mean  such  a  loss, 
on  the  part  of  the  race,  of  scientific  knowledge  pre- 
viously possessed  as  eliminates  some  opportunities 
to  make  advances  to  nature  whose  elimination  must 
result  in  a  lowering  of  the  point  of  intersection  of  the 
two  curves.  This  sort  of  change  we  seldom  think 
of  because  in  our  age  scarcely  any  useful  invention 
is  forgotten,  scarcely  any  useful  scientific  knowledge 
lost ;  but  it  is  clear  that  if  knowledge  of  the  electric  car 
were  to  be  permanently  lost,  the  value  curve  of  our 
Diagram  IV  would  fall  from  the  course  N  X  to  the  course 
NR,  say,  so  that  the  point  of  intersection  of  the  two  curves 
would  fall  back  from  X  to  W. 

§  66.  The  causes  on  the  cost  side  that  raise  the  normal 
rate  of  interest,  that  is,  the  conditions  that  raise  the 


I08  A  THEORY  OF  INTEREST 

height  of  the  point  of  intersection  of  OR  and  C  H  through 
their  effect  on  C  H  only,  must  all  be  included  in  the  one 
group  of  the  conditions  that  increase  b'b"  relatively 
to  W".  This  follows  from  the  fact  (see  §  48)  that  the 

h'h" 

normal  rate  must  always  be  the  excess  of  — —  over   i. 

bo 

But  it  is  best  to  divide  this  comprehensive  group  into 
two.  It  will  be  recalled  that  b'  and  b"r  stand,  not  for 
the  actual  subjective  factors,  at  the  later  time  in  ques- 
tion, of  the  changing  society  and  of  the  advancer  respec- 
tively, but  for  those  subjective  factors  as  estimated  by 
the  advancer.  We  may  therefore  divide  the  conditions 
that  increase  b'b"  relatively  to  W"  into  two  groups, 
those  that  make  the  advancer's  subjective  factor  decline 
actually  with  the  passing  of  time,  relatively  to  the 
changing  society's,  and  those  that  make  it  seem  to  him 
to  do  so  more  than  it  does  so  actually. 

§  67.  To  the  first  of  these  two  groups  belong,  notably, 
all  changes  that  decrease  the  duration  of  human  life  and 
all  that  diminish  the  degree  to  which  men  generally 
identify  their  heirs  with  themselves.  The  shorter  a 
person's  life  is  to  be,  the  greater  the  actual  decline,  with 
the  passing  of  time,  of  his  subjective  factor  relatively 
to  the  changing  society's.  And  the  less  a  person  iden- 
tifies his  heirs  with  himself,  the  less  he  cares  about  their 
pleasure  and  pain,  the  greater  the  actual  decline,  with 
the  passing  of  time,  of  his  subjective  factor  relatively 
to  the  changing  society's. 

§  68.  To  the  second  of  the  two  groups  —  that  of 
changes  which  increase  the  advancer's  estimate  of  the 
relative  decline  of  his  subjective  factor  with  the  passing 


CAUSES   OF  THE  NORMAL  RATE   OF  INTEREST       109 

of  time  without  increasing  the  relative  decline  itself 
in  reality  —  belong  such  changes  as  those  that  decrease 
men's  powers  of  realizing,  of  feeling  as  real,  their  own 
future  pleasures  and  pains  and  the  pleasures  and  pains 
of  their  heirs. 

§  69.  I  need  hardly  say  that  the  causes  on  the  cost 
side  of  a  fall  of  the  normal  rate  of  interest  are  the  changes 
contrary  to  those  on  the  cost  side  just  set  forth  as  causing 
a  rise. 

§  70.  It  will  be  noticed  that,  on  the  cost  side,  it  is  the 
causes  of  a  fall  rather  than  those  of  a  rise  of  the  normal 
rate  of  interest  that  we  are  familiar  with  in  the  present 
age.  At  present  human  life  is  growing  longer  rather  than 
shorter,  men  are  probably  growing  more  rather  than  less 
solicitous  about  the  welfare  of  their  heirs,  and  their  error 
in  overestimating  the  decline  of  their  personal  subjective 
factors  of  value,  relatively  to  that  of  the  changing  so- 
ciety's subjective  factor,  is  probably  declining.  So  far 
as  the  causes  on  the  cost  side  are  concerned,  therefore, 
we  should  expect  the  normal  rate  of  interest  to  be  falling 
at  the  present  time. 

On  the  value  side,  on  the  other  hand,  it  is  the  causes  of 
a  rise  of  the  normal  rate  of  interest  rather  than  those  of 
a  fall  that  seem  to  be  at  work  nowadays.  Inventions 
and  discoveries  that  tend  to  raise  the  value  line,  as  from 
NW  to  NX,  are  being  made  rather  than  being  forgotten ; 
an  increase  of  technical  skill,  such  as  tends  to  raise  the  value 
line  likewise,  seems  to  be  continuous ;  and  opportunities 
to  invest  in  education  that  have  the  same  tendency  open 
up  all  the  time.  So  far,  therefore,  as  the  causes  on  the 
value  side  of  a  rise  or  a  fall  of  the  normal  rate  of  interest 


HO  A  THEORY  OF  INTEREST 

are  concerned,  we  should  expect  that  rate  to  be  rising 
at  the  present  time. 

§  7 1 .4  Let  us  consider  whether  recent  history  confirms 
this  theory  of  the  causes  of  a  rise  or  a  fall  in  the  rate  of 
interest.  The  past  century  has  been  marked  by  an  ex- 
traordinary number  of  inventions  and  discoveries,  and 
by  a  rapid  extension  among  men  generally  of  the  scien- 
tific knowledge  first  acquired  by  the  few.  So  far  as  these 
conditions  only  were  concerned,  therefore,  the  tendency 
throughout  the  century  should  have  been,  according  to 
the  foregoing  theory,  for  the  rate  of  interest  to  be  high. 
But  on  the  other  hand  the  century  has  not  been  marked 
by  any  tendency  on  the  part  of  people  generally  to  die 
younger,  to  be  less  solicitous  about  their  heirs,  or  to  be 
less  rational  in  their  estimation  of  future  conditions; 
rather  has  the  tendency  been  in  the  opposite  direction. 
So  far  as  this  second  point  only  is  concerned,  therefore, 
the  tendency  throughout  the  century  should  have  been, 
according  to  the  foregoing  theory,  for  the  rate  of  interest 
to  be  kept  from  rising  much  by  the  making  of  advances 
to  nature  sufficient  in  amount  to  produce  that  effect. 
And  what,  according  to  the  foregoing  theory,  should 
have  been  the  result  and  effect  of  both  the  groups  of 
conditions  mentioned  ?  Simply  the  vibrating  of  the  rate 
of  interest  up  and  down  near  a  point  above  the  minimum 
rate  determined  by  the  conditions  on  the  cost  side,  and 
the  keeping  of  the  rate  down  so  low  as  on  the  average  it 
has  been  only  by  the  supplying  of  advances  to  nature  — 
in  the  form  of  railroads,  machinery,  buildings,  and  what 
not  —  in  enormous  amounts.  And  that  is  precisely 
what  actually  happened  during  the  century. 


CAUSES  OF  DIVERGENCE  FROM  NORMAL  RATE    in 

CAUSES  OF  DIVERGENCE  FROM  THE  NORMAL  RATE 

§  72.  Up  to  this  point  we  have  been  studying  the  nor- 
mal rate  of  interest,  the  word  normal  being  used  in  a 
sense  denned  in  §  18.  We  have  now  to  consider  the 
causes  of  the  divergence  from  the  normal  of  the  actual 
rate.  These  causes,  taken  with  those  of  the  normal  rate, 
should  fully  account  for  the  actual  rate  under  any  cir- 
cumstances. 

§  73.  The  nature  of  these  causes  is  suggested  in  the 
definition  of  the  word  normal  in  §  18.  Excepting  only 
the  cause  implied  in  the  fifth  paragraph  of  §  41  and  re- 
ferred to  in  §  66  and  §  68,  namely  the  error  of  estimation 
on  the  part  of  the  advancer,  which  I  have  included  in 
the  group  of  those  that  determine  the  rate  I  call  normal, 
all  causes  whatever  that  prevent  men's  acting,  in  respect  to 
the  making  of  advances,  according  to  their  best  economic 
interests  would  be  classed  by  me  as  those  that  make  the 
actual  rate  of  interest  diverge  from  the  normal  rate. 
Nearly  all  these  preventing  conditions  may  be  called 
the  imperfections  of  the  market  in  advances.  Specific 
examples  lie  all  about  us.  In  Alaska,  let  us  say,  there 
are  many  opportunities  to  make  advances1  to  nature 
whose  (nominal)  value  will  be  8  %  of  the  principal,  in 
other  words  many  opportunities  to  make  advances  to 
nature  that  will  "earn  8  %."  At  the  same  time  there 
are  many  persons  in  the  United  States  —  to  say  nothing 
of  those  in  Alaska  and  elsewhere  —  who  are  aware  that 

1  It  is  to  be  remembered  that  an  advance,  as  I  use  the  word,  is  not 
the  goods  or  services  advanced,  which  are  things  of  two  dimensions, 
but  a  thing  of  three  dimensions,  as  explained  in  §  30. 


112  A   THEORY  OF  INTEREST 

such  opportunities  exist  and  who  would  gladly  make 
some  of  the  8  %  advances,  in  addition  to  all  the  advances 
they  make  at  present,  but  who  are  prevented  from  mak- 
ing them  by  fear  of  being  swindled  or  by  inability  to  get 
together  in  cooperation  enough  other  persons  of  like 
desires  to  make  the  investment  to  such  advantage  as  to 
yield  the  8  %  mentioned.  Thus  the  fear  of  dishonesty 
and  the  inability  of  large  numbers  of  scattered  persons 
to  put  their  small  advances  together  so  as  to  invest 
them  to  the  best  advantage,  —  these  are  two  notable 
sorts  of  preventing  conditions  that  cause  the  actual  rate 
of  interest  to  diverge  from  the  normal  rate.  Such  con- 
ditions are  most  prevalent,  evidently,  in  new  and  com- 
mercially ill-organized  communities,  and  least  prevalent 
in  commercially  well-organized  communities,  that  is, 
those  in  which  such  institutions  as  "  Dun's "  and 
"  Bradstreet's "  and  all  kinds  of  banks  are  highly 
developed. 

The  effect  on  the  actual  rate  of  interest  of  such  imper- 
fections of  the  market  in  advances  as  I  have  just  men- 
tioned is,  of  course,  to  raise  it.  In  the  light  of  the  previ- 
ous chapters  the  reason  is  clear.  Any  conditions  must 
raise  the  actual  rate  of  interest,  the  nominal  value  of 
advances  per  unit  of  the  principal,  which  tend  to  reduce 
the  supply  of  advances  to  nature.  And  such  imperfec- 
tions in  the  market  for  advances  obviously  tend  to  re- 
duce the  supply  of  advances  to  nature  just  as  any  im- 
perfections in  the  market  for  any  sort  of  goods  tend  to 
reduce  the  supply  of  that  sort  of  goods ;  for  an  obstruc- 
tion to  the  purchase  of  any  good  is  an  obstruction  to  its 
virtual  production  (through  demand)  by  the  person  who 


CAUSES  OF  DIVERGENCE   FROM   NORMAL  RATE      113 

would  purchase  it  if  the  obstruction  did  not  exist ;  and 
an  obstruction  to  the  borrowing  of  wealth,  which  is  equiv- 
alent to  the  purchase  of  an  advance  to  nature,  is  an 
obstruction  to  the  virtual  making  of  that  advance 
(through  demand)  by  the  person  who  would  borrow  the 
wealth  if  the  obstruction  did  not  exist. 

It  must  not  be  inferred,  however,  that  the  effect  of  all 
imperfections  of  the  market  in  advances  must  be  to  raise 
the  actual  rate  of  interest.  Imperfections  of  another  sort, 
namely  those  that  tend  to  prevent  the  withdrawal  of 
advances  that  have  once  been  made,  must  lower  the  rate 
of  interest.  Just  as  there  are  hindrances  in  the  way  of 
making  investments  which  are  perfectly  satisfactory 
to  the  investor  so  far  as  all  the  considerations  briefly 
explained  above  are  concerned,  so  there  are  hindrances 
in  the  way  of  un-making  investments  which  have  become 
unsatisfactory  to  the  investor  so  far  as  these  same  con- 
siderations are  concerned.  And  these  latter  hindrances 
tend  to  reduce  the  actual  rate  of  interest.  An  example  of 
these  hindrances  is  the  practical  difficulty  of  spending  to- 
day ten  dollars  of  the  thousand  you  lent  last  week  to  the 
United  States  Steel  Company  by  buying  one  of  its  bonds. 
Of  course  you  could  shift  the  bearing  of  the  advance  of 
the  $10  to  other  shoulders  by  borrowing  $10,  on  the 
security  of  your  bond,  at  a  bank ;  but  in  the  way  of  your 
doing  so  is  a  considerable  hindrance,  the  bother  that 
the  transaction  would  entail  on  yourself  and  the  bank. 
Very  likely  you  will  go  on  advancing  the  $10  through 
days  or  weeks  when,  so  far  as  the  principles  discussed 
in  this  book  above  are  concerned,  you  prefer  not 
to ;  and  in  that  case  you  thereby  lower  the  actual  rate 


114  A  THEORY   OF  INTEREST 

of  interest  as  the  result  of  conditions  not  covered  by  the 
word  normal  as  I  use  it. 

§  74.  Having  now  accounted  for  what  I  call  the  nor- 
mal rate  of  interest,  and  for  the  divergencies  from  that 
normal  rate  that  result  in  the  actual  rate,  I  must  make 
another  important  distinction.  Distinct  from  the  actual 
rate  of  interest  under  any  conditions  there  is  a  somewhat 
higher  rate  which  appears  in  the  case  of  any  advance  in- 
volving an  appreciable  risk  of  losing  the  principal.  This 
might  be  called  the  actual  rate  as  modified  by  a  factor  of 
risk.  The  reason  why  I  do  not  call  it  the  actual  rate 
simply  is  that  only  a  part  of  what  appears  to  be  interest 
in  the  case  is  interest  proper,  the  rest  being  clearly  a 
return  to  the  advancer  necessary  to  induce  him  to  take 
the  risk  of  losing  the  principal  involved  in  the  case. 
Suppose  two  loans  to  be  made  in  the  same  loan  market  — 
and  that  the  most  perfectly  organized  market  in  the  world 
—  and  suppose  them  to  be  made  at  the  same  time.  Even 
under  those  conditions  one  may  be  at  what  is  called,  in 
business  transactions,  "6  %  interest,"  the  other  at  what 
is  called  "3  %  interest."  Under  those  conditions  the 
difference  between  6  and  3  is  not  a  difference  between 
rates  of  what  is  really  interest :  it  is  a  difference  between 
rates  of,  on  the  one  hand  what  is  really  interest  plus  the 
price  of  the  bearing  of  a  certain  risk  of  losing  the  principal, 
and  on  the  other  hand  what  is  really  interest  plus  virtu- 
ally nothing  in  the  guise  of  such  a  price  of  risk-bearing. 
Thus  in  the  case  of  both  loans  the  actual  rate,  prop- 
erly speaking,  is  barely  less  than  3  %,  the  extra  3  %  of 
the  6  %  in  one  of  the  cases  arising  from  causes  distinct 
from  those  giving  rise  to  interest  proper. 


CAUSES  OF  DIVERGENCE  FROM  NORMAL  RATE      115 

§  75.  Finally,  distinct  from  the  actual  rate  as  modi- 
fied by  the  factor  of  risk  is  the  same  rate  as  further  mod- 
ified by  expected  changes,  between  the  beginning  and 
the  end  of  the  time  covered  by  the  advance,  in  the  nomi- 
nal value  of  the  money  or  goods  named  as  the  principal. 
I  say  the  nominal  value  "of  the  money  or  goods  named  as 
the  principal "  instead  of  saying  simply  the  nominal  value 
"of  the  principal"  because,  by  definition,  the  principal 
is  a  thing  whose  nominal  value  does  not  change  with  the 
passing  of  time.  If  you  think  of  lending  me  $100  for  a 
year,  say,  at  a  time  when  you  think  a  dollar  will  depre- 
ciate during  the  year  2  %,  you  have  no  economic  motive 
for  making  the  loan  unless  you  get  back  not  only  interest 
but  also  $2  to  cover  what  has  sometimes  been  called 
depreciation  of  the  principal  but  what  cannot  be  called 
that  by  any  one  who  has  defined  principal  correctly. 
The  principal  in  the  case,  really,  is  $100  at  the  beginning 
of  the  year  and  $102  at  the  end  of  it,  and  the  interest 
(as  modified  by  the  factor  of  risk)  is  the  difference  be- 
tween all  that  you  exact  at  the  end  of  the  year  and  $102. 
If,  then,  what  you  exact  at  the  end  of  the  year  is  $106, 
the  actual  rate  of  interest  as  modified  by  the  factor  of 
risk  in  the  case  is  really  -j-^-g-.  To  any  one,  however, 
who  did  not  fully  understand  what  the  principal  is,  that 
rate  as  thus  modified  would  appear  to  be  y$~o,  or  6  %. 
The  rate  thus  made  up  on  the  basis  of  a  misconceived 
principal  we  may  call  the  apparent  rate.1 

1  In  this  paragraph  I  have  covered  what  is  discussed  by  many  writers 
under  the  head  of  interest  and  money.  See,  for  example,  Pantaleoni's 
Pure  Economics,  Part  III,  Chap.  Ill,  7 ;  Marshall's  Principles,  pp. 
676-677;  I.  Fisher's  The  Rate  of  Interest,  pp.  257-288;  and  G.  Cassel's 
Nature  and  Necessity  of  Interest,  Chap.  V,  especially  pp.  163-166. 


Il6  A   THEORY   OF   INTEREST 

§  76.  From  the  "apparent  rate"  of  interest  in  any 
specific  case  we  could  determine,  if  we  allowed  for  the 
error  in  conceiving  the  principal,  the  "actual  rate  as 
modified  by  the  factor  of  risk"  in  the  case.  From  this 
latter  rate  we  could  then  determine,  if  only  we  could 
subtract  the  price  necessary  to  induce  the  advancer  to 
assume  the  risk  in  question,  the  "actual  rate"  (apart 
from  risk).  And,  having  the  actual  rate  apart  from 
risk,  we  could  determine  the  "normal  rate"  of  interest 
if  we  could  subtract  from  the  actual  rate  or  add  to  it 
just  enough  to  cover  the  effects  of  the  imperfections 
of  the  market  in  advances  and  of  other  hindrances  — 
aside  from  those  I  have  referred  to  in  §  66  and  §  68  in 
connection  with  "estimation"  -  to  men's  acting,  so  far 
as  advances  are  concerned,  in  accordance  with  their 
best  economic  interests.  But  these  are  important  ifs : 
in  reality  we  cannot  know  precisely  how  much  to  sub- 
tract from  apparent  interest  to  get  actual  interest  or 
how  much  to  subtract  from  or  to  add  to  actual  interest 
to  get  normal  interest.  Nor  is  it  important  that  we 
should  do  these  things :  what  is  important  is  merely 
that  we  should  understand,  first,  the  nature  of  that  part 
of  apparent  interest  which  is  not  really  interest  at  all, 
secondly,  the  nature  of  the  hindrances  which  cause 
actual  interest  to  differ  from  normal  interest,  and,  thirdly 
and  above  all,  the  nature  and  causes  of  normal  interest. 
These  important  ends  I  hope  I  have  forwarded  in  this 
book. 


CHAPTER  VII 
OTHER  THEORIES  OF  INTEREST 

§  77.  So  far  as  I  know,  no  explanation  of  interest 
advanced  hitherto  has  contained  a  definition  of  the  prin- 
cipal at  once  explicit  and  defensible.  And  surely,  since 
interest  is  nothing  but  a  surplus  above  principal,  failure  to 
define  the  principal  correctly  is  a  defect  in  a  theory  of 
interest  that  is  truly  fundamental.  To  me,  therefore, 
every  theory  of  interest  advanced  hitherto  with  which 
I  am  acquainted  is  not  merely  incorrect  in  details  but 
inadequate  essentially. 

I  propose  now  to  examine  critically  some  of  the  out- 
standing specific  features  of  the  most  noteworthy  theories 
of  interest  that  have  recently  been  in  vogue. 

"DIFFERENCES  IN  WANT  AND   PROVISION  FOR  WANT" 

§  78.  I  begin  with  what  has  been  suggested  as  a  cause 
of  interest  by  several  authors  and  has  been  presented  in 
its  classical  form  by  Professor  Bohm-Bawerk  (as  "the 
first  great  cause  of  difference  in  value  between  present 
and  future  goods")  under  the  name  of  "the  different 
circumstances  of  want  and  provision  (Bedarf  und  Deck- 
ung)  in  present  and  future."  * 

1  See  Chapter  II  of  Book  V  of  The  Positive  Theory  of  Capital  by  Eugen 
von  Bohm-Bawerk,  translated  by  William  Smart,  London,  1891,  Mac- 
millan  &  Co. 

117 


Il8  A   THEORY  OF  INTEREST 

These  words  last  quoted  describe  in  general  terms 
what  I  also  hold  to  be  the  cause  of  interest :  it  is  pre- 
cisely the  "different  circumstances  of  want  and  provision 
in  present  and  future,"  on  the  part  of  any  advancer,  that 
make  him,  according  to  my  theory,  unwilling  to  make 
advances,  that  is,  unwilling  to  exchange  present  goods 
for  future  goods,  beyond  the  point  where  he  gets  a  cer- 
tain nominal  surplus  by  doing  so.  Yet  I  know  of  no 
author  whose  treatment  of  this  point  reveals  the  true 
cause  of  interest.  Bohm-Bawerk's  chapter  on  it  —  to 
restrict  the  criticism  to  that  —  besides  denning  the  prin- 
cipal incorrectly,1  fails  to  prove  the  essential  point  that 
in  the  preponderating  number  of  cases  the  relation  be- 
tween want  and  provision  in  the  present  as  compared 
with  that  in  the  future  is  such  as  to  make  present  goods 
more  valuable  than  future  goods.  An  examination  of 
the  chapter,  as  reprinted  below,  will  show  the  reader 
that  the  essential  point  I  speak  of  depends  on  the  truth 
of  the  assertion,  found  in  the  latter  part  of  the  third 
paragraph,  that  the  cases  are  rare  in  which  "it  is  difficult 
or  impracticable  to  keep  the  present  goods  till  a  time  of 
worse  provision  comes."  And  that  assertion  is  by  no 
means  true :  in  fact  it  is  very  costly,  in  most  cases,  to 
keep  present  goods  till  a  time  of  worse  provision  in  the 
future.  Even  so  durable  a  thing  as  a  plow  has  to  be 
housed  if  it  is  not  to  deteriorate  rapidly ;  and  roofs  cost 
labor  and  wear  out  in  a  few  years. 

1  See  the  third  sentence  of  Bohm-Bawerk's  chapter,  quoted  below. 

The  same  erroneous  definition  of  the  principal  is  implied  by  many 
other  writers,  for  example  by  Professor  F.  A.  Fetter,  on  page  135  (Chap. 
16,  §  II,  i)  and  page  141  (Chap.  17,  §  i,  i)  of  his  admirable  Principles 
of  Economics  (The  Century  Co.,  N.  Y.,  1907). 


OTHER   THEORIES  OF  INTEREST  119 

Following  is  the  chapter  itself,  as  translated  by  Pro- 
fessor Smart. 

"  Differences  in  Want  and  Provision  for  Want" 

"The  first  great  cause  of  difference  in  value  between 
present  and  future  goods  consists  in  the  different  cir- 
cumstances of  want  and  provision  (Bedarf  und  Deckung) 
in  present  and  future.  Present  goods,  as  we  know,  re- 
ceive their  value  from  the  circumstances  of  want  and 
provision  in  the  present :  future  goods  from  the  same 
circumstances  in  those  future  periods  of  time  when  they 
will  come  into  our  disposal.  If  a  person  is  badly  in  want 
of  certain  goods,  or  of  goods  in  general,  while  he  has 
reason  to  hope  that,  at  a  future  period,  he  will  be  better 
off,  he  will  always  value  a  given  quantity  of  immediately 
available  goods  at  a  higher  figure  than  the  same  quantity 
of  future  goods.  In  economic  life  this  occurs  very  fre- 
quently, and  may  be  considered  as  typical  in  the  two  fol- 
lowing cases.  First,  in  all  cases  of  immediate  distress  and 
necessity.  A  peasant  who  has  had  a  bad  harvest,  or  sus- 
tained loss  by  fire,  an  artisan  who  has  had  heavy  ex- 
penses through  illness  or  death  in  his  family,  a  labourer 
who  is  starving ;  all  these  agree  in  valuing  the  present 
shilling,  which  lifts  them  out  of  direst  need,  ever  so  much 
more  than  the  future  shilling,  —  the  proof  being  the  usuri- 
ous conditions  to  which  such  people  often  submit  in  order 
to  raise  money  at  the  moment.  Second,  in  the  case  of 
persons  who  have  reason  to  look  forward  to  economical 
circumstances  of  increasing  comfort.  Thus  all  kinds  of 
beginners  who  have  no  means,  such  as  young  artists,  law- 
yers, officials,  budding  doctors,  men  going  into  business, 


120  A  THEORY  OF  INTEREST 

are  only  too  ready,  in  return  for  a  sum  of  present 
goods  which  assists  them  to  start  in  the  vocation  they 
have  chosen,  and  acts  as  foundation  of  their  economical 
existence,  to  promise  a  considerably  larger  sum  on  the 
condition  that  they  do  not  require  to  pay  it  until  they  are 
in  receipt  of  a  decent  income. 

"Of  course  the  contrary  also  occurs  not  unfrequently 
in  economical  life.  There  are  persons  who  are  com- 
paratively well  off  at  the  moment,  and  who  are  likely 
to  be  worse  off  in  the  future.  To  this  category  belongs, 
among  others,  that  very  considerable  number  of  people 
whose  income  is  obtained,  mostly  or  altogether,  by 
personal  exertions,  and  will,  presumably,  fall  away  at  a 
later  period  of  life  when  they  become  unfit  for  work. 
A  merchant's  clerk,  for  instance,  who  is  in  his  fiftieth 
year,  and  has  an  income  of  £100,  cannot  expect  to  have 
anything  better  ten  years  later  than,  perhaps,  a  small 
retiring  allowance  of  £30,  or  an  annuity  which  he  may 
secure  by  purchase  at  an  assurance  office.  It  is  evident 
that  to  such  people  the  marginal  utility  that  depends  on 
a  shilling  spent  now  is  smaller  than  that  depending  on  a 
shilling  available  in  the  more  badly  secured  future.  It 
would  seem  that,  in  such  cases,  a  present  shilling  should  be 
less  valued  than  a  future  one.  And  so  it  would  be  if  pres- 
ent goods  were  necessarily  spent  in  the  present,  but  that 
is  not  the  case.  Most  goods,  and  among  them,  particu- 
larly, money,  which  represents  all  kinds  of  goods  indiffer- 
ently, are  durable,  and  can,  therefore,  be  reserved  for  the 
service  of  the  future.  The  case,  then,  between  present 
and  future  goods  stands  thus.  The  only  possible  uses 
of  future  goods  are,  naturally,  future,  while  present  goods 


121 

have  the  same  possibility  of  future  use,  and  have  besides 
—  according  to  choice  —  either  the  present  uses,  or  those 
future  ones  which  may  turn  up  in  the  time  that  inter- 
venes between  the  present  moment  and  the  future  point 
of  time  with  which  the  comparison  is  being  made. 

"Here  then  are  two  possibilities.  Either  it  is  the  case 
that  all  those  uses  of  the  present  and  near  future,  which 
are  generally  taken  into  consideration  as  regards  the  good 
in  question,  are  less  important  than  the  future  uses  ;  and 
in  this  case  the  present  good  will  be  reserved  for  these 
future  uses,  will  derive  its  value  from  them,  and  will  be 
just  equal  in  value  to  a  future  good  similarly  available. 
Or  it  is  the  case  that  one  of  the  earlier  uses  is  more  im- 
portant ;  and  then  the  present  good  gets  its  value  from 
this  use,  and  has,  therefore,  the  advantage  over  the 
future  good,  which  can  only  obtain  its  value  from  a  less 
important  future  employment.  But,  usually,  one  never 
knows  that  some  unforeseen  occurrence  in  the  near 
future  may  not  give  rise  to  some  more  urgent  want.  At 
any  rate  such  a  thing  is  possible,  and  it  gives  a  chance 
of  profitable  employment  to  a  good  already  on  hand, 
such  as,  naturally,  a  good  that  will  only  come  into  our 
possession  in  the  future  has  not  got ;  —  a  chance  which, 
as  we  have  seen,  is  calculated  in  the  amount  of  the  value, 
and  assessed,  according  to  practical  although  incorrect 
methods,  as  an  increment  graduated  according  to  its 
probability.  To  put  it  in  figures.  With  £100  which  will 
come  into  my  hands  at  the  end  of  five  years,  I  can  only 
aim  at  a  marginal  utility  determined  by  the  situation  of 
things  in  the  year  1896  ;  we  shall  put  this  utility  down  at 
1000  ideal  units.  With  £100  at  my  disposal  now,  I  can, 


122  A  THEORY  OF  INTEREST 

at  the  least,  realise  the  same  marginal  utility  of  1000 
units,  but  if  an  urgent  want,  arising  in  the  meantime, 
gives  me  an  opportunity  of  obtaining  a  marginal  utility 
of  1 200,  I  may,  possibly,  realise  it.  Say,  now,  that  the 
probability  of  such  an  opportunity  occurring  equals 
one-tenth,  I  shall  estimate  the  value  of  the  present  £100 
at  1000  units  certain,  and,  beyond  that,  at  one-tenth  of 
the  possible  surplus  of  200 ;  that  is,  in  all,  at  1020  units. 
Present  goods  are,  therefore,  in  the  worst  case,  equal  in 
value  to  future  goods,  and,  as  a  rule,  they  have  the  ad- 
vantage over  them  in  being  employed  as  a  reserve.  The 
only  exception  occurs  in  those  comparatively  rare  cases 
where  it  is  difficult  or  impracticable  to  keep  the  present 
goods  till  the  time  of  worse  provision  comes.  This 
happens,  for  instance,  in  the  case  of  goods  subject  to  rapid 
deterioration  or  decay,  such  as  ice,  fruit,  and  the  like. 
Any  fruit  merchant  in  harvest  time  will  put  a  consider- 
ably higher  value  on  a  bushel  of  grapes  to  be  delivered  in 
April  than  on  a  bushel  of  grapes  in  his  store  at  the  time. 
Or  say  that  a  rich  man  is  anticipating  a  long  period  of 
arrest,  during  which  his  living  will  be  conformed  to  the 
hard  fare  of  prison  regime,  how  willingly  would  he  give 
the  price  of  a  hundred  present  luxurious  meals  if  he  could 
ensure  ten  such  meals  during  his  captivity  ! 

"We  may,  then,  draw  up  the  balance-sheet  which 
shows  the  influence  of  the  different  circumstances  of 
Want  and  its  Provision  in  present  and  future  as  follows. 
A  great  many  persons  who  are  not  so  well  provided  for  in 
the  present  as  they  expect  to  be  in  the  future,  set  a  con- 
siderably higher  value  on  present  goods  than  on  future. 
A  great  many  persons  who  are  better  provided  for  in 


OTHER   THEORIES  OF  INTEREST  123 

the  present  than  they  expect  to  be  in  the  future,  but  who 
have  the  chance  of  preserving  present  goods  for  the 
service  of  the  future,  and,  moreover,  of  using  them  as  a 
reserve  fund  for  anything  that  may  turn  up  in  the  mean- 
time, value  present 'goods  either  at  the  same  figure  as 
future,  or  a  little  higher.  It  is  only  in  a  fractional  mi- 
nority of  cases,  where  communication  between  present 
and  future  is  hindered  or  threatened  by  peculiar  circum- 
stances, that  present  goods  have,  for  their  owners,  a 
lower  subjective  use  value  than  future.  This  being  the 
state  of  things,  even  if  there  was  nothing  else  co-operating 
with  this  difference  of  want  and  provision  in  present  and 
future,  the  resultant  of  the  subjective  valuations,  which 
determines  the  objective  exchange  value,  would  ob- 
viously be  such  that  present  goods  must  maintain  a  pro- 
portionate advantage,  a  proportionate  agio  over  future. 
But,  besides  this,  there  are  other  co-operating  circum- 
stances which  work,  even  more  distinctly,  in  the  same 
direction." 

Besides  the  criticisms  on  this  chapter  that  I  have  made 
already  one  more  is  called  for :  the  chapter  quite  fails 
to  reveal  the  true  bearing  of  want  and  provision  at  two 
separated  times  on  the  persistence  of  interest.  That 
bearing  is  shown,  it  seems  to  me,  only  by  an  analysis 
essentially  like  that  of  Chapter  IV  of  this  book. 

"UNDERESTIMATION  OF  FUTURE  PLEASURES  AND 
PAINS" 

§  79.  A  second  cause  of  interest,  advanced  by  many 
writers  and  included  in  my  theory,  is  what  Bb'hm-Bawerk 


124  A  THEORY   OF  INTEREST 

calls1  the  tendency  to  "attach  a  less  importance  to 
future  pleasures  and  pains  simply  because  they  are 
future."  This  is  given  a  place  in  my  theory,2  it  will  be 
recalled,  as  a  notable  condition  of  that  error  of  estima- 
tion —  in  respect  to  the  cost  and  the  value,  to  the  ad- 
vancer, of  a  proposed  advance  —  which  would  prevent 
some  advances  whose  value  to  him  would  in  reality  be 
greater  than  their  cost  to  him. 

To  regard  this  cause  as  acting  cumulatively  with  others 
that  limit  the  supply  of  advances,  as  do  Bohm-Bawerk 
and  some  other  writers,  seems  to  me  entirely  correct; 
but  to  give  it  as  such  a  cause  without  explicitly  mention- 
ing any  other  such  cause  (see  §  66  above),  as  do  some 
writers,  not  including  Bohm-Bawerk,  is  to  offer  a  theory 
that  is  altogether  inadequate.  For  it  is  clear  from  the 
analysis  in  Chapter  IV  above  that  interest  would  persist, 
provided  only  that  men  did  not  live  forever  and  did  not 
regard  the  pleasures  and  pains  of  their  remote  descendants 
as  virtually  their  own,  whether  or  not  anybody  ever  under- 
estimated his  own  future  pleasures  and  pains,  in  other 
words  whether  or  not  anybody  ever  underestimated  his 
own  future  subjective  factor  of  pleasure  and  pain  rela- 
tively to  that  of  the  changing  society. 

" TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS" 

§  80.  Consider  now  the  third  of  the  three  conditions 
advanced  by  Bohm-Bawerk  as  the  causes  of  interest, 
what  he  calls  the  "technical  advantages  residing  in  pres- 
ent goods,"  as  compared  with  future  goods,  due  to  the 

1  Positive  Theory  of  Capital,  p.  253. 

2  See  the  fifth  paragraph  of  §  41  and  §§  66  and  68. 


OTHER  THEORIES   OF  INTEREST  125 

alleged  superiority,  explained  in  Chapter  V  of  Book  V 
of  The  Positive  Theory  of  Capital,  of  long  over  short 
processes  of  production. 

The  grounds  of  this  third  cause,  which  Bohm-Bawerk 
calls  the  "chief  pillar"  *  of  his  whole  theory,  are  fully 
set  forth  by  him  in  a  passage,  beginning  at  page  260  of 
his  translated  work,  which  the  reader  is  requested  to 
examine  at  this  point.  The  passage  consists  of  the  first 
three  paragraphs  of  the  excerpts  reprinted  from  Bohm- 
Bawerk  in  §  82  below.  The  heart  of  it  is  this  sentence 
at  the  end  of  the  first  paragraph:  "As  a  rule,  present 
goods  are,  on  technical  grounds,  preferable  instruments 
for  the  satisfaction  of  human  wants,  and  assure  us, 
therefore,  of  a  higher  marginal  utility  than  future  goods." 

§  81.  Now  it  is  true,  for  the  reasons  given  in  §§  43-47 
above,  that  present  goods  are,  to  any  person  or  group  of 
persons,  preferable  instruments,  for  the  satisfaction  of 
their  wants,  to  future  goods  of  the  same  nominal  value. 
And  therefore,  of  course,  present  goods  command,  in 
any  exchange  of  present  for  future  goods,  a  premium  over 
future  goods  of  the  same  nominal  value.  Therefore,  too, 
the  supply  of  advances  to  nature  —  that  is,  that  of 
advances  of  services  embodied  in  machinery,  railroads, 
houses,  and  other  future-service  goods — is  checked  at  the 
point  where  the  only  possible  suppliers  of  such  advances, 
namely  particular  persons  or  groups  of  persons,  esti- 
mate the  value  to  them  of  a  further  advance  as  no  greater 
than  its  cost  to  them.  And  when  advances  to  nature 
cease  at  that  point,  the  services  of  the  future-service 
goods  are  bound  to  show,  when  they  accrue  with  the 

1  Work  cited,  p.  264. 


126  A  THEORY  OF  INTEREST 

passing  of  time,  a  nominal  surplus  over  present  services 
equal  to  them  in  value  to  the  advancers.  And  it  is  this 
nominal  surplus,  this  preferability,  from  the  point  of 
view  of  the  changing  society  contemporary  with  each 
moment  of  the  passing  time,  of  the  future  services  that 
will  be  yielded  by  present  future-service  goods  to  those 
present  goods  themselves,  that  Bohm-Bawerk  miscon- 
ceived as  a  "technical  superiority"  of  present  goods 
that  are  capable  of  yielding  future  services  (and  there- 
fore of  any  present  goods  of  the  same  market  value)  to 
future  goods  or  services  of — -as  I  should  express  it  — 
the  same  nominal  value.  The  principle  that  "round- 
about methods"  of  production  "lead  to  greater  results 
than  direct  methods,"  then,  which  Bohm-Bawerk  con- 
siders "one  of  the  most  important  and  fundamental  prop- 
ositions in  the  whole  theory  of  production,"  becomes,  when 
rightly  conceived,  merely  the  principle  that  opportunities 
exist  for  so  embodying  present  labor  in  advances  to  nature 
that  the  future  services  resulting  shall  exceed  in  nominal 
value  the  present  services  which  that  labor  might  have 
rendered  instead.  And  that  these  opportunities  remain 
open  is  due  —  to  repeat  again  the  point  I  have  repeated 
so  often  —  to  the  fact  that  the  supply  of  advances  to 
nature,  which  are  inevitably  involved  in  making  the 
labor  yield  its  services  in  the  future  instead  of  in  the 
present,  is  limited,  for  the  reasons  explained  in  the  pre- 
ceding chapters,  at  the  point  where  future  services,  when 
they  accrue,  show  a  nominal  surplus  over  present  services 
that  are  exactly  equivalent  to  them  from  the  point  of 
view  of  the  advancers,  or  in  other  words  at  the  point 
where,  in  the  estimation  of  advancers,  present  services 


OTHER  THEORIES   OF  INTEREST 


127 


have  more  value  to  them  than  future  services  of  the  same 
nominal  value  will  have. 

This,  together  with  what  I  say  in  the  third  paragraph 
of  §  84  below  in  regard  to  the  conception  of  "productiv- 
ity," seems  to  me  to  express  the  true  conception  of  the 
facts  which  Bohm-Bawerk  misconceived  as  the  "techni- 
cal advantage  residing  in  present  goods,"  as  compared 
with  future  goods,  due  to  the  superiority  of  long  over 
short  processes  of  production. 

§  82.  Some  of  Bohm-Bawerk's  errors  on  this  point 
should,  perhaps,  be  pointed  out  specifically. 

In  the  first  place  it  is  not  true  —  though  Bohm-Bawerk 
implies  it  throughout l  —  that  processes  long  in  time  are 

1  The  Positive  Theory  of  Capital,  p.  19:  "The  lesson  to  be  drawn 
from  all  these  examples  alike  is  obvious.  It  is  —  that  a  greater  result 
is  obtained  by  producing  goods  in  roundabout  ways  than  by  producing 
them  directly.  Where  a  good  can  be  produced  either  way,  we  have  the 
fact  that,  by  the  indirect  way,  a  greater  product  can  be  got  with  equal 
labour,  or  the  same  product  with  less  labour." 

Same  work,  p.  260:  "It  is  an  elementary  fact  of  experience  that 
methods  of  production  which  take  time  are  more  productive.  That  is 
to  say,  given  the  same  quantity  of  productive  instruments,  the  lengthier 
the  productive  method  employed  the  greater  the  quantity  of  products 
that  can  be  obtained." 

Same  work,  p.  84 :  "  On  the  whole  it  may  be  said  that  not  only 
are  the  first  steps  more  productive,  but  that  every  lengthening  of  the 
roundabout  process  is  accompanied  by  a  further  increase  in  the  tech- 
nical result ;  as  the  process,  however,  is  lengthened  the  amount  of  prod- 
uct, as  a  rule,  increases  in  a  smaller  proportion.  This  proposition 
also  is  based  on  experience,  and  only  on  experience.  What  it  says  must 
be  simply  taken  as  a  fact  of  the  technique  of  production." 

Same  work,  p.  91 :  "By  means  of  these  primary  productive  powers 
man  may  make  the  consumption  goods  he  desires,  either  immediately,  or 
through  the  medium  of  intermediate  products  called  Capital.  The  latter 
method  demands  a  sacrifice  of  time,  but  it  has  an  advantage  in  the  quan- 


128  A  THEORY  OF  INTEREST 

necessarily  more  productive  —  in  any  sense  of  the  word  - 
per  unit  of  labor  than  processes  shorter  in  time.  To  suppose 
this  to  be  true  is  an  error  analogous  to  supposing  that  the 
more  a  thing  costs,  the  greater  must  be  its  value.  Into  this 
latter  error  Bohm-Bawerk  would  be,  of  all  men,  the  last  to 
fall ;  and  that  he  fell  into  the  former  one  is  surprising. 

It  is  true,  of  course,  that  many  of  the  processes  that  are 
"most  productive,"  in  the  sense,  say,  of  yielding  services 
of  the  most  nominal  value,  require  also  a  long  time. 
But  that  is  not  because  to  lengthen  a  process  in  time  is 
necessarily  to  make  it  more  productive  in  that  sense : 
it  is  because  any  lengthening  of  a  process  that  does 
happen  to  increase  the  nominal  value  of  the  services 
resulting  is  limited,  for  the  reasons  already  explained 
in  this  book,  at  the  point  where  the  advancing  involved 
in  the  lengthening  of  the  process  barely  fails  to  yield  the 
advancers  a  surplus-to-them,  and  where,  therefore,  it 
must  yield  them  a  nominal  surplus  persistently. 

It  will  be  seen  that  these  several  amendments  to  the 
"main  pillar"  of  Bohm-Bawerk's  theory  of  interest  are 
all  involved  in  the  one  change  of  substituting  for  his 
vague  "future  goods"  the  definite  and  correct  conception 
of  future  goods  l  of  the  same  nominal  value  as  the  present 
goods  with  which  they  are  to  be  compared.  The  moment 

tity  of  product,  and  this  advantage,  although  perhaps  in  decreasing 
ratio,  is  associated  with  every  prolongation  of  the  roundabout  way 
of  production." 

1  This  is  the  correct  conception  of  the  principal  so  far  as  goods  are 
concerned.  Of  course  the  most  helpful  conception  of  the  principal, 
as  I  have  previously  pointed  out,  is  the  conception  of  it  in  terms  not  of 
goods  at  all  but  of  services.  The  best  substitute  for  Bohm-Bawerk's 
"present  goods  and  future  goods"  is  present  services  and  future  services 
of  the  same  nominal  value. 


OTHER   THEORIES   OF  INTEREST  129 

that  substitution  is  made,  we  are  in  a  fair  way  to  discover 
that  the  supposed  "technical  superiority"  of  present 
goods  over  future  goods  is  not  a  technical  superiority  at 
all  but  a  superiority  in  exchange  value  from  the  point 
of  view  of  particular  persons  or  groups  of  persons  (as 
distinguished  from  the  changing  group  which  composes 
the  society  of  the  passing  time). 

It  is  well  worth  while  to  inquire  next  how  so  able  a 
thinker  as  Bohm-Bawerk  could  have  come  to  so  errone- 
ous a  conclusion  on  this  point.  He  came  to  it,  strangely 
enough,  by  way  of  the  fallacy  that  lesser  minds  have 
fallen  into  so  often,  the  fallacy  of  reasoning  in  a  circle. 
As  we  have  seen,  the  true  reason  why  "long  processes" 
are  "more  productive"  than  "short  processes"  is  that 
"present  goods"  command  a  premium  over  "future 
goods."  If,  therefore,  we  proceed  to  say  that  the  pre- 
mium which  "present  goods"  command  over  "future 
goods"  is  due  to  the  "greater  productivity"  of  present 
goods,  we  have  simply  completed  the  circuit  and  come 
back  to  the  point  we  started  from. 

Failing  to  conceive  clearly  just  why  "longer  processes " 
are  "more  productive"  than  "shorter  processes,"  Bohm- 
Bawerk  not  unnaturally  thought  he  saw  in  the  fact  that 
the  longer  processes  which  men  adopt  are  often  in  some 
sense  "more  productive"  than  shorter  processes  a  reason 
why  "present  goods"  command  a  premium  over  "future 
goods"  that  in  some  ill-defined  sense  are  equal  to  the 
"present  goods"  except  for  their  difference  of  time. 
His  error  may  be  traced  in  the  following  passages  of 
The  Positive  Theory  of  Capital.  The  italic  capitals, 
which  are  mine,  indicate  words  that  betray  th£  error 


130  A  THEORY  OF  INTEREST 

most  clearly.  The  ordinary  capitals,  which  are  also  mine, 
indicate  words  that  imply  an  inadequate  or  incorrect 
definition  or  conception  of  the  principal.1  The  small 
italics  are  those  of  Smart's  text.  My  comments  on  the 
passage,  which  immediately  follow  it,  may  well  be  read 
before  as  well  as  after  the  passage  itself.  , 

"There  is  still  a  third  reason  why  present  goods  are, 
as  a  rule,  worth  more  than  future.  The  fact  on  which 
it  is  based  has  long  been  known  in  a  general  way,  but  its 
essential  nature  has  been  thoroughly  misunderstood. 
Hidden  in  a  perfect  wilderness  of  mistakes,  economists 
ever  since  Say  and  Lauderdale  have  been  in  the  habit 
of  going  to  it,  under  the  name  'productivity  of  capital,' 
for  their  explanation  and  justification  of  Interest.  This 
name,  which  has  already  been  the  cause  of  so  many 
errors,  and  which,  besides,  does  not  altogether  corre- 
spond with  what  it  is  intended  to  convey,  I  shall  lay  on 
one  side,  and  shall  confine  myself  to  the  facts  of  the  case 
pure  and  simple.  These  facts  are  as  follows  : — that,  as  a 

1  In  this  connection  may  be  quoted  also  some  other  passages  from 
The  Positive  Theory  of  Capital  which  strongly  suggest  an  erroneous 
conception  of  the  principal. 

P.  249 :  "  If  a  person  is  badly  in  want  of  certain  goods,  or  of  goods  in 
general,  while  he  has  reason  to  hope  that,  at  a  future  period,  he  will  be 
better  off,  he  will  always  value  a  given  quantity  of  immediately  available 
goods  at  a  higher  figure  than  the  same  quantity  of  future  goods." 

Same  work,  p.  91 :  "The  latter  method  demands  a  sacrifice  of  time, 
but  it  has  an  advantage  in  the  quantity  of  product,  and  this  advantage, 
although  perhaps  in  decreasing  ratio,  is  associated  with  every  prolonga- 
tion of  the  roundabout  way  of  production." 

Same  work,  p.  82:  "With  an  equal  expenditure  of  primary  pro- 
ductive powers  (that  is  to  say,  labour  and  valuable  natural  powers) 
more  or  better  goods  can  be  produced  by  a  wisely  chosen  capitalist 
process  than  could  be  by 'direct  unassisted  production." 


OTHER  THEORIES  OF  INTEREST  131 

rule,  present  goods  are,  on  technical  grounds,  preferable 
instruments  for  the  satisfaction  of  human  want,  and  assure 
us,  therefore,  a  higher  marginal  utility  than  future  goods. 

"It  is  an  elementary  fact  of  experience  that  methods 
of  production  which  take  time  are  more  productive. 
That  is  to  say,  given  the  same  QUANTITY  of  productive 
instruments,  the  lengthier  the  productive  method  em- 
ployed the  greater  the  QUANTITY  of  products  that  can 
be  obtained.  In  previous  chapters  we  went  very  thor- 
oughly into  this,  showed  the  reasons  of  it,  and  illustrated 
and  confirmed  it  by  many  examples.  I  venture  to  think 
we  may  now  assume  it  as  proved.  If,  then,  we  take  an 
AMOUNT  of  productive  instruments  available  at  a 
certain  point  of  time  as  given,  we  have  to  represent 
the  product,  which  may  be  turned  out  by  increasingly 
lengthy  processes,  under  the  picture  of  a  series  increas- 
ing in  a  certain  ratio,  regular  or  irregular.  Suppose  that, 
in  the  year  1888,  we  have  command  of  a  definite 
QUANTITY  of  productive  instruments,  say,  thirty  days 
of  labour,  we  may  in  terms  of  the  above  proposition,  as- 
sume something  like  the  following.  The  month's  labour, 
employed  in  methods  that  give  a  return  immediately, 
and  are,  therefore,  very  unremunerative,  will  yield  only 
100  UNITS  OF  PRODUCT :  employed  in  a  one  year's 
process,  it  yields  200  UNITS,  but,  of  course,  yields  them 
only  for  the  year  1889  :  employed  in  a  two  years'  process 
it  yields  280  UNITS  —  for  the  year  1890  —  and  so  on 
in  increasing  progression:  say,  350  UNITS  for  1891, 
400  for  1892, 440  for  1893,  470  for  1894,  and  500  for  1895. 

"Compare  with  this  what  we  may  get  from  a  similar 
QUANTITY  of  productive  instruments,  namely,  a 


132 


A  THEORY  OF  INTEREST 


month's  labour,  under  the  condition  that  we  do  not  get 
possession  of  the  labour  till  a  year  later.  A  month's 
labour  which  falls  due  in  the  year  1889  evidently  yields 
nothing  FOR  THE  ECONOMIC  YEAR  1888.  IF 
ANY  RESULT  IS  TO  BE  GOT  FROM  IT  IN  THE 
YEAR  1889  it  can  only  be  by  employing  it  in  the  most 
unremunerative  (because  immediate)  production,  and 
that  result  will  be,  as  above,  100  units.  77V  1890  it  is 
possible  to  have  a  return  of  200  units  by  employing  it 
in  a  one  year's  method  of  production ;  IN  1891  to  have 
280  units  by  employing  it  in  a  two  years'  process,  and  so 
on.  In  exactly  the  same  way,  with  a  month's  labour 
falling  due  two  years  later,  in  1890,  nothing  can  be 
had  to  satisfy  the  wants  of  THE  ECONOMIC  YEARS 
1888  AND  1889,  while  100  units  may  be  got  FOR  1890 
by  an  unremunerative  immediate  process,  200  FOR 
1891,  280  FOR  1892,  and  so  on.  If  we  group  together 
in  one  table  the  result  obtainable  for  the  satisfaction  of 
our  wants  from  a  similar  amount  of  present,  next  year's, 
and  succeeding  years'  productive  instruments,  we  get 
the  following  scheme  :  - 

A  MONTH'S  LABOUR  OF  THE  YEAR 


YIELDS  FOR  THE 
ECONOMIC 
PERIOD 


1888 


1890 
1891 
1892 

1893 
1894 

1895 


1888 

1889 

1890 

1891 

I  CO 







200 

100 





280 

2OO 

IOO 

. 

350 

280 

2OO 

IOO 

400 

35° 

280 

200 

440 

400 

35° 

280 

470 

440 

400 

350 

500 

470 

440 

400 

UNITS  OF  PROD- 
UCT 


OTHER  THEORIES  OF  INTEREST  133 

Putting  these  figures  into  words,  the  table  shows  that, 
whatever  economic  period  we  may  fix  upon,  our  economic 
interests  for  that  period  are  more  advanced  by  a  month's 
labour  of  1888  than  by  a  month's  labour  of  1889,  by  one  of 
1889  than  by  one  of  1890,  and  so  on.  TO  MEET  THE 
WANTS  OF  1888,  for  example,  a  month's  labour  ex- 
pended in  the  year  1889  or  1890  gives  us  nothing,  while 
a  month's  labour  expended  in  1888  places  at  our  com- 
mand at  least  100  units  of  product.  TO  MEET  THE 
WANTS  OF  1893  a  month  of  1890  gives  us  350  units, 
a  month  of  1889  400  units,  a  month  of  1888  440  units. 
Whatever  period  of  time  we  take  as  our  standpoint  of 
comparison,  the  earlier  (present)  AMOUNT  of  produc- 
tive instruments  is  seen  to  be  superior,  technically,  to 
the  equally  great  later  (future)  AMOUNT. 

"But  is  it  superior  also  in  the  height  of  its  marginal 
utility  and  value  ?  Certainly  it  is.  For  if,  in  every 
conceivable  department  of  wants  for  the  supply  of  which 
we  may  or  shall  employ  it,  it  puts  more  means  of  satis- 
faction at  our  disposal,  it  must  have  a  greater  importance 
for  our  wellbeing.  Of  course  I  am  aware  that  the  greater 
amount  need  not  always  have  the  greater  value ;  —  a 
bushel  of  corn  in  a  year  of  famine  may  be  worth  more 
than  two  bushels  after  a  rich  harvest ;  a  silver  shilling 
before  the  discovery  of  America  was  worth  more  than 
five  shillings  are  now.  But  for  one  and  the  same  person, 
at  one  and  the  same  point  of  time,  the  greater  amount  has 
always  the  greater  value ;  whatever  may  be  the  absolute 
value  of  the  bushel  or  the  shilling,  this  much  is  certain, 
that,  for  me,  two  shillings  or  two  bushels  which  I  have 
to-day  are  worth  more  than  one  shilling  or  one  bushel 


134  A  THEORY  OF  INTEREST 

which  I  have  to-day.  And  in  our  comparison  of  the  value 
of  a  present  and  a  future  AMOUNT  of  productive  instru- 
ments the  case  is  exactly  similar.  Possibly  the  470  units 
of  product  which  may  be  made  from  a  month's  labour 
in  1889  for  the  year  1895,  are  worth  less  than  the 
350  units  which  may  be  got  from  the  same  for  the 
year  1892,  and  the  latter,  notwithstanding  their  num- 
bers, may  be  the  most  valuable  product  which  can  be 
made  out  of  a  month  of  1889  in  general.  In  any  case 
the  400  units  which  a  man  can  gain  by  a  month's  labour 
of  the  year  1888  for  the  year  1892  are  still  more 
valuable,  and  therefore  the  superiority  of  the  earlier 
(present)  amount  of  productive  instruments  —  here  and 
everywhere,  however  the  illustration  may  be  varied  — 
remains  confirmed. 

"The  truth  of  the  proposition,  that  the  technical 
superiority  of  present  to  future  means  of  production 
must  also  be  associated  with  a  superiority  in  value,  may 
be  made  absolutely  convincing  by  mathematical  evidence 
if  the  tabular  comparison,  which  we  have  drawn  out  to 
show  the  technical  productiveness  of  different  years  of 
productive  instruments,  be  extended  to  the  marginal 
utility  and  value  of  the  same.  And  since  we  have  to 
deal  here  with  a  proposition  which  will  form  the  chief 
pillar  in  my  interest  theory,  I  prefer  to  err  on  the  side  of 
making  it  too  plain  rather  than  risk  not  making  it  plain 
enough,  and  I  shall  spare  no  pains  to  prove  it  in  the 
most  complete  way.  In  other  respects,  too,  the  trouble 
it  costs  us  will  not  be  altogether  lost :  as  we  proceed  we 
shall  get  an  occasional  glimpse  into  certain  relations 
which  are  seldom  or  never  taken  thought  of,  and  yet, 


OTHER  THEORIES  OF  INTEREST  135 

none  the  less,  have  some  importance  towards  giving  us 
a  complete  and  thorough  grasp  of  the  whole. 

"The  marginal  utility  and  value  of  means  of  produc- 
tion depend,  as  we  know,  on  the  anticipated  marginal 
utility  and  value  of  their  product.  But  the  means  of 
production  of  which  we  have  been  speaking,  the  month's 
labour,  may  be  invested  in  a  production  that  yields  an 
immediate  return,  or  in  a  one,  two,  three,  or  ten  years' 
period  of  production,  and,  according  as  it  is  so  invested, 
we  may  obtain  the  very  different  product  of  100,  200, 
280,  350  units,  and  so  on.  Which  of  these  products  is 
to  be  our  standard?  The  foregoing  chapters  have  al- 
ready given  us  the  answer.  In  the  case  of  goods  which 
may  be  employed  in  different  ways  yielding  different 
marginal  utilities,  it  is  the  highest  marginal  utility  that 
is  the  standard.  Therefore,  in  our  present  case,  it  is  that 
product  which  produces  the  greatest  amount  of  value. 
But  this  need  not  coincide  with  the  largest  product,  the 
product  which  contains  the  greatest  number  of  units; 
on  the  contrary,  it  seldom  or  never  coincides  with  that. 
We  should  obtain  the  greatest  number  of  units  by  an 
infinitely  long  production  process,  or  a  process  lasting 
a  hundred  or  two  hundred  years.  But  goods  which 
first  come  into  possession  in  the  lifetime  of  our  grand- 
children or  great-grandchildren,  have,  in  our  valuation 
of  to-day,  little  or  no  value. 

"In  determining  which,  of  various  possible  products, 
has  the  highest  value  for  us,  we  are  guided  by  the  two 
considerations  of  which  we  have  just  spoken.  First,  we 
are  guided  by  the  anticipated  position  of  our  provision 
at  the  various  periods  of  time.  If,  for  instance,  a  man 


136  A  THEORY   OF  INTEREST 

is  ill  provided  for  in  the  present,  or  not  provided  for  at 
all,  the  UNIT  OF  PRODUCT 1  in  the  present  may, 
on  that  very  account,  have  so  high  a  marginal  utility 
and  value,  that  the  sum  of  value  of  100  present  units  of 
product  is  greater  to  him  than  that  of  500  units  which  he 
might  have  at  his  command  in  1895.  To  another  man, 
again,  whose  present  is  as  well  provided  for,  or  nearly 
as  well  provided  for,  as  his  future,  the  advantage  in 
numbers  may  give  an  advantage  in  value  to  the  500 
units.  The  second  consideration  by  which  we  are  guided 
is,  that  our  present  valuation  of  a  future  good  or  product 
does  not  depend  on  its  true  marginal  utility,  but  on  our 
subjective  estimation  of  the  marginal  utility.  But,  in 
forming  this  subjective  estimate,  there  takes  place,  as 
we  have  already  seen,  a  kind  of  perspective  diminution ; 
a  diminution  which  is  in  direct  ratio  with  the  futurity 
of  the  time  to  which  the  good  in  question  belongs.  The 
amount  of  which  we  are  in  search,  therefore,  the  greatest 
sum  of  value,  will  evidently  belong  to  that  one,  among 
the  various  possible  products,  the  number  of  whose 
items,  multiplied  by  the  value  of  the  unit  of  product 
(as  that  value  shows  itself  with  regard  to  the  relation  of 
want  and  provision  for  want  in  the  particular  economic 
period,  and  with  regard  to  the  diminution  which  future 
goods  undergo  from  perspective)  gives  the  greatest 
amount  of  value. 

"We  shall  put  our  illustration  in  figures  chosen  at 
random.  I  wish  to  emphasize  that  the  figures  can  be 

1  By  the  word  "unit"  here  Bohm-Bawerk  must  mean  unit  as  defined 
in  terms  of  amount  and  quality.  He  has  nowhere  suggested  the  unit 
of  nominal  value  which  the  analysis  requires. 


OTHER  THEORIES   OF  INTEREST  137 

chosen  quite  at  random  and  varied  by  the  reader  at  will, 
for  our  proposition  maintains  its  validity  in  every  con- 
ceivable position  of  subjective  valuations.  Moreover  I 
intentionally  take  figures  varying  very  greatly  and  ir- 
regularly, it  being  obvious  enough,  without  any  special 
demonstration,  that,  if  the  value  of  the  unit  of  goods 
were  not  to  vary  for  the  different  periods,  or  not  to  vary 
much,  the  present  means  of  production,  as  giving  a 
greater  quantity  of  products,  would  inevitably  give  us 
also  a  greater  sum  of  value.  Assume,  then,  quite  at 
random,  that,  for  a  certain  individual,  the  true  marginal 
utility  and  value  of  the  unit  of  product  —  taking  into 
account  his  special  circumstances  of  provision  which  we 
shall  suppose  are,  on  the  whole,  gradually  improving  — 
are  as  follows :  in  1888,  5  units  of  value  (pounds,  shil- 
lings, or  units  of  any  ideal  standard) ;  in  1889,  4 ;  in 
1890,  3.3;  in  1891,  2.5;  in  1892,  2.2;  in  1893,  2-Tl  m 
1894,  2;  and  in  1895,  1.5.  This  true  marginal  utility, 
then,  by  reason  of  perspective,  experiences,  for  the  later 
periods,  an  irregularly  progressive  reduction  of  this 
kind :  for  1888  it  is,  subjectively  estimated,  5  (without 
reduction);  for  1889,  instead  of  4,  it  is  3.8;  for  1890, 
instead  of  3.3,  it  is  only  3 ;  for  1891,  2.2  ;  for  1892,  2 ; 
for  1893,  I-8;  for  1894,  1.5;  and  for  1895,  i.  If,  now, 
on  the  basis  of  these  figures,  we  calculate  the  sums  of 
value  represented  by  the  different  possible  products  of  a 
month's  labour  falling  due  in  the  various  years,  from 
1888  to  1891,  we  get  the  following  tables :  - 


138 


A  THEORY  OF  INTEREST 


A  MONTH'S  LABOUR  AVAILABLE  IN  1888  YIELDS 


FOR  THE 
ECONOMIC 
PERIOD 

UNITS  OF 
PRODUCT 

TRUE  MARGINAL 
UTILITY  or 
UNIT 

MARGINAL 
UTILITY 
REDUCED  IN 
PERSPECTIVE 

AMOUNT  OF 
VALUE  OF 
ENTIRE 
PRODUCT 

1888 

IOO 

5 

5 

500 

1889 

2OO 

4 

3-8 

760 

1890 

280 

3-3 

3 

840 

1891 

35° 

2-5 

2.2 

770 

1892 

400 

2.2 

2 

800 

1893 

440 

2.1 

1.8 

792 

1894 

470 

2 

1-5 

705 

1895 

500 

i-5 

I 

500 

A  MONTH'S  LABOUR  AVAILABLE  IN  1889  YIELDS 


FOR 

TRUE 

REDUCED 

ECONOMIC 

UNITS 

MARGINAL 

MARGINAL 

VALUE 

PERIOD 

UTILITY 

UTILITY 

1888 



5 

5 



1889 

IOO 

4 

3-8 

380 

1890 

200 

3-3 

3 

600 

1891 

280 

2-5 

2.2 

616 

1892 

35° 

2.2 

2 

700 

1893 

400 

•  2.1 

1.8 

720 

1894 

440 

2 

i-5 

660 

1895 

470 

i-5 

i 

470 

OTHER  THEORIES   OF  INTEREST 


139 


A  MONTH'S  LABOUR  AVAILABLE  IN  1890  YIELDS 


FOR 

TRUE 

REDUCED 

ECONOMIC 

UNITS 

MARGINAL 

MARGINAL 

VALUE 

PERIOD 

UTILITY 

UTILITY 

1888 



5 

5 

— 

1889 



4 

3-8 



1890 

ICO 

3-3 

3 

300 

1891 

2OO 

2-5 

2.2 

440 

1892 

280 

2.2 

2 

560 

1893 

35° 

2.1 

1.8 

630 

1894 

400 

2 

i-5 

600 

1895 

440 

i-5 

i 

440 

A  MONTH'S  LABOUR  AVAILABLE  IN  1891  YIELDS 


FOR 

TRUE 

REDUCED 

ECONOMIC 

UNITS 

MARGINAL 

MARGINAL 

VALUE 

PERIOD 

UTILITY 

UTILITY 

1888 



5 

S 



1889 



4 

3-8 



1890 



3-3 

3 



1891 

IOO 

2-5 

2.2 

220 

1892 

200 

2.2 

2 

400 

1893 

280 

2.1 

1.8 

5°4 

1894 

35° 

2 

I-S 

sii 

1895 

400 

i-S 

I 

400 

140  A   THEORY  OF  INTEREST 

"The  conclusion  we  draw  from  these  tables  is  the 
following.  The  highest  value  of  product  obtainable  by 
the  month's  labour  available  in  1888  —  that  which  deter- 
mines its  own  valuation  —  is  840 :  the  highest  value 
obtainable  by  a  month's  labour  available  in  1889  is  only 
720 :  while  the  highest  value  obtainable  by  a  month's 
labour  available  in  1890  and  1891  is  630  and  525  respec- 
tively. As  a  fact,  therefore,  the  present  month's  labour 
is  superior  to  all  future  ones,  not  only  in  technical  pro- 
ductiveness, but  also  in  marginal  utility  and  value. 

"I  repeat  emphatically  that  this  result  is  not  an 
accidental  one,  such  as  might  have  made  its  appearance 
in  consequence  of  the  particular  figures  used  in  our 
hypothesis.  ON  THE  SINGLE  ASSUMPTION 
THAT  LONGER  METHODS  OF  PRODUCTION 
LEAD  GENERALLY  TO  A  GREATER  PRODUCT, 
IT  IS  A  NECESSARY  RESULT;  a  result  which  must 
have  occurred,  in  an  exactly  similar  way,  whatever 
might  have  been  the  figures  of  quantity  of  product  and 
value  of  unit  in  the  different  years. 

"I  must,  further,  lay  particular  weight  on  the  fact,  that 
THIS  RESULT  DOES  NOT  MAKE  ITS  APPEAR- 
ANCE SIMPLY  BECAUSE,  IN  OUR  HYPOTH- 
ESIS, WE  HAVE  INTRODUCED,  AS  ALREADY 
ACTIVE,  THOSE  OTHER  TWO  CIRCUMSTANCES 
WHICH  ARE  FITTED  TO  ACCOUNT  FOR  A  SUR- 
PLUS VALUE  OF  PRESENT  AS  AGAINST  FU- 
TURE GOODS  — NAMELY,  A  DIFFERENCE  IN 
THE  CIRCUMSTANCES  OF  PROVISION  AT  THE 
VARIOUS  PERIODS  OF  TIME,  AND  A  DIMINU- 
TION OF  THE  FUTURE  UTILITY  BY  WAY  OF 


OTHER  THEORIES   OF  INTEREST 


141 


PERSPECTIVE.  THE  SUPERIORITY  IN  VALUE 
OF  PRESENT  MEANS  OF  PRODUCTION,  WHICH 
IS  BASED  ON  THEIR  TECHNICAL  SUPERIORITY, 
IS  NOT  ONE  BORROWED  FROM  THESE  CIRCUM- 
STANCES; IT  WOULD  EMERGE  OF  ITS  OWN 
STRENGTH  EVEN  IF  THESE  WERE  NOT  ACTIVE 
AT  ALL.  I  have  introduced  the  two  circumstances 
into  the  hypothesis  only  to  make  it  a  little  more  true 
to  life,  or,  rather,  to  keep  it  from  being  quite  absurd. 
Take,  for  instance,  the  influence  of  the  reduction  due 
to  perspective  entirely  out  of  the  illustration,  and  we 
get  the  following  figures :  — 

A  MONTH'S  LABOUR  OF  THE  YEAR 


YIELDS  FOR  THE 
ECONOMIC 
PERIOD 


1888 
1889 
1890 
1891 
1892 

1893 
1894 


1888 

1889 

1890 

1891 

500 



. 



800 

400 





924 

660 

33° 

— 

875 

700 

500 

250 

880 

770 

616 

440 

924 

840 

735 

588 

94" 

880 

800 

700 

75° 

7°5 

660 

600 

UNITS  OF  VALUE 


"We  see  that  now  the  absolute  figures  of  the  sums  of 
value  are  increased  throughout,  and  also  that  the 
economic  centre  of  gravity  is  transferred  to  another 
year ;  but  the  thing  which  concerns  us  is  that  the  result 
remains  unchanged ;  —  the  month's  labour  of  1888  shows 
the  highest  figure  of  value,  and  all  the  others  a  decreas- 
ingly  smaller  one. 

"But  if  we  were  also  to  abstract  the  difference  in  the 


142  A  THEORY  OF  INTEREST 

circumstances  of  provision  in  different  periods  of  time, 
the  situation  would  receive  the  stamp  of  extreme  im- 
probability, even  of  self-contradiction.  If  the  Value  of 
the  unit  of  product  were  to  be  the  same  in  all  periods  of 
time,  however  remote,  the  most  abundant  product 
would,  naturally,  at  the  same  time  be  the  most  valu- 
able. But  since  the  most  abundant  product  is  obtained 
by  the  most  lengthy  and  roundabout  methods  of  pro- 
duction, —  perhaps  extending  over  decades  of  years,  — • 
the  economic  centre  of  gravity,  for  all  present  means  of 
production,  would,  on  this  assumption,  be  found  at 
extremely  remote  periods  of  time  —  which  is  entirely 
contrary  to  all  experience.  And,  besides,  if  such  a 
state  of  things  were  to  emerge  at  any  particular  point 
of  time,  it  would  immediately  bring  its  own  correction. 
For  if  every  employment  of  goods  for  future  periods  is, 
not  only  technically,  but  economically,  more  remunera- 
tive than  the  employment  of  them  for  the  present  or 
near  future,  of  course  men  would  withdraw  their  stocks 
of  goods,  to  a  great  extent,  from  the  service  of  the 
present,  and  direct  them  to  the  more  remunerative 
service  of  the  future.  But  this  would  immediately 
cause  an  ebb-tide  in  the  provision  for  the  present,  and 
a  flood  in  the  provision  for  the  future,  for  the  future 
would  then  have  the  double  advantage  of  having  a 
greater  amount  of  productive  instruments  directed  to  its 
service,  and  those  instruments  employed  in  more  fruitful 
methods  of  production.  Thus  the  difference  in  the  cir- 
cumstances of  provision,  which  might  have  disappeared 
for  the  moment,  would  recur  of  its  own  accord. 

"But  it  is  just  at  this  point  that  we  get  the  best 


OTHER  THEORIES  OF  INTEREST 


143 


proof  that  the  superiority  in  question  is  independent  of 
differences  in  the  circumstances  of  provision :  so  far 
from  being  obliged  to  borrow  its  strength  and  activity 
from  any  such  difference,  it  is,  on  the  contrary,  able,  if 
need  be,  to  call  forth  this  very  difference.  —  Thus  we 
get,  as  result  of  our  digression,  the  assured  conviction 
of  two  things ;  —  first,  that  THE  PRODUCTIVE  SU- 
PERIORITY OF  PRESENT  GOODS  ASSURES 
THEM,  NOT  ONLY  A  SURPLUS  IN  PRODUCT, 
BUT  A  SURPLUS  IN  VALUE,  and,  second,  that,  IN 
THIS  SUPERIORITY,  WE  HAVE  TO  DEAL  WITH 
A  THIRD  CAUSE  OF  THE  SURPLUS  VALUE, 
AND  ONE  WHICH  IS  INDEPENDENT  OF  ANY 
OF  THE  TWO  ALREADY  MENTIONED."  l 

"We  have  seen  that  there  are  three  factors,  each  of 
which,  INDEPENDENTLY  OF  THE  OTHER,  is 
adequate  to  account  for  a  difference  in  value  between 
present  and  future  goods  in  favour  of  the  former.  These 
three  factors  are :  The  difference  in  the  circumstances 
of  provision  between  present  and  future ;  the  under- 
estimate, due  to  perspective,  of  future  advantages  and 
future  goods ;  and,  finally,  the  greater  fruitfulness  of 
lengthy  methods  of  production." 

The  error  betrayed  in  the  passages  I  have  printed  in 
italic  capitals  is  that  of  inferring  that  because,  for  ex- 
ample, a  month's  labor  of  1888  results  in  more  "units 

1  The  passage  here  quoted  is  all  except  the  last  two  pages  of  Bohm- 
Bawerk's  chapter  on    The    Technical    Superiority    of   Present    Goods. 
I  quote  so  fully  because  this  work  of  Bohm-Bawerk's  is  out  of  print 
and  not  easily  accessible  to  some  who  may  read  this  book. 

2  This  paragraph  is  from  p.  273  of  Bohm-Bawerk's  Positive   Theory 
of  Capital. 


144  A  THEORY  OF  INTEREST 

of  product"  for  the  year  1890  than  a  month's  labor  of 
1889  does,  the  former  must  be  the  more  valuable.  It  is 
revealed  at  once  by  saying  that  a  month's  labor  of  1889 
can  be  employed  in  a  two-year  process,  in  a  ten-year 
process,  or  in  a  process  of  any  duration  you  please,  just 
as  well  as  a  month's  labor  of  1888  could.  Of  course, 
Professor  Bohm-Bawerk  would  reply,  but  the  labor  of 
1888,  employed  in  a  two-year  process,  would  yield  the 
product  in  1890,  whereas  that  of  1889,  employed  in  a 
process  of  the  same  duration,  would  yield  the  product 
in  1891.  Well,  I  rejoin,  what  of  it?  You  must  not 
assume  that  the  product  of  1890  is  more  valuable  than 
a  product  exactly  equal  (either  in  your  sense  of  "quantity 
and  kind"  or  in  mine  of  "nominal  value")  except  that 
it  is  of  1891 ;  for  that  would  be  assuming,  as  an  essential 
part  of  your  explanation,  quite  all  that  you  are  trying  in 
your  book  to  explain.  You  are  trying  to  explain  why 
"present  goods"  are  more  valuable  than  "future  goods"  ; 
but  without  assuming  just  that  as  true,  your  whole 
attempt  to  connect  the  superiority  of  long  over  short 
processes  of  production  with  the  premium  that  "present 
goods"  command  over  "future  goods"  fails.  "Future 
goods,"  I  repeat,  may  be  used  in  as  long  processes  of  pro- 
duction as  "present  goods" ;  and  the  fact  that,  if  the 
processes  are  of  equal  length,  the  product  will  appear 
later  in  the  case  of  the  "future  goods,"  is  nothing  against 
the  "future  goods"  unless  you  assume  quite  all  that  we 
are  trying  to  explain. 

§  83.  To  see  the  fallacy  from  another  point  of  view, 
consider  the  passages  in  italic  capitals  in  the  third  para- 
graph above,  which  expresses  the  fallacious  conclusion 


OTHER   THEORIES  OF  INTEREST  145 

itself  very  explicitly.  "The  productive  superiority," 
says  Bohm-Bawerk,  "of  present  goods  assures  them, 
not  only  a  surplus  in  product,  but  a  surplus  in  value,  and, 
second,  ...  in  this  superiority  we  have  to  deal  with  a 
third  cause  of  the  surplus  value,  and  one  which  is  inde- 
pendent of  any  of  the  two  already  mentioned."  As 
future  goods  can  be  employed  in  a  productive  process 
of  any  length  you  please,  just  as  present  goods  can,  the 
only  superiority  of  present  goods  over  future  goods  of  equal 
nominal  value  l  is  a  superiority  in  value  to  particular  per- 
sons or  groups  of  persons;  and  that  superiority,  so  far 
from  being  independent  of  the  first  and  second  of  the 
three  causes  of  interest  enumerated  by  Bohm-Bawerk, 
is  dependent,  as  we  have  seen,  on  nothing  whatever  but 
those  two  causes.  It  is  only  because  the  wants  of  any 
particular  person  or  groups  of  persons  are  in  fact  de- 
creasing, relatively  to  those  of  the  society  contemporary 
with  each  moment  of  the  passing  time,  and  because  the 
estimate  of  that  relative  decrease  of  their  wants,  as 
made  by  the  persons  concerned,  may  be  exaggerated, 
that  present  goods  have  for  those  persons  a  value  greater 
than  that  of  future  goods  equal  to  them  in  nominal 
value.  Bohm-Bawerk's  supposed  third  cause  of  in- 
terest, therefore,  which  he  regards  as  the  "chief  pillar" 
of  his  theory,  cannot  stand  the  test  of  critical  analysis. 
"Present  goods"  have  no  technical  superiority  over 
"future  goods."  The  superiority  of  present  goods  over 
those  future  goods  with  which  they  are  to  be  compared 
in  the  analysis  of  the  interest  problem,  namely  future 

1 1  abandon  Bohm-Bawerk's  conception  of  the  principal  for  my  own, 
because  I  assume  that  the  reader  is  no  longer  in  doubt  on  that  point. 
L 


146  A  THEORY  OF  INTEREST 

goods  of  the  same  -nominal  value,  is  not  a  technical  su- 
periority at  all,  but  the  same  value-to-particular-persons- 
superiority  that  was  mistaken  by  the  upholders  of  the 
"productivity  theory,"  whom  Bohm-Bawerk  scorned, 
for  superiority  in  productivity.  So  far  as  this  "chief 
pillar"  is  concerned,  indeed,  Bohm-Bawerk's  theory, 
original  as  it  appeared  in  the  new  setting  and  the  brilliant 
treatment  given  it  by  him,  is  nothing  whatever,  essen- 
tially, but  the  old  productivity  theory  decked  out  in 
new  errors.  Although,  like  the  theorists  of  the  produc- 
tivity school,  in  which  also  some  distinguished  economists 
are  still  to  be  numbered,  Bohm-Bawerk  saw  the  impor- 
tance for  the  theory  of  interest  of  the  two  undoubted  facts, 
first,  that  there  remain  open  persistently  opportunities 
to  secure  a  nominal  surplus  by  embodying  services  in 
advances  to  nature,  and,  secondly,  that  the  amount  of 
this  nominal  surplus  corresponds  to  the  time  dimension 
as  well  as  to  the  other  dimensions  of  the  advance  to 
nature  necessary  in  the  case,  he  failed  as  completely  as 
did  the  productivity  theorists  to  build  those  facts  cor- 
rectly into  a  theory  of  interest. 

"PRODUCTIVITY" 

§  84.  That  the  usefulness  of  tools  does  not  account 
for  the  premium  that  "present  goods"  command  over 
"future  goods"  has  been  demonstrated  unanswerably  by 
Bohm-Bawerk  1  and  many  others.  And  the  validity  of 
some  of  these  demonstrations,  including  that  of  Bohm- 
Bawerk,  is  not  in  the  least  degree  affected  by  substituting 

1  Notably,  for  example,  on  p.  139  of  his  Capital  and  Interest,  trans- 
lated by  Smart :  Macmillan  &  Co.,  London,  1890. 


OTHER  THEORIES  OF  INTEREST  147 

for  the  vague  "present  goods"  and  "future  goods"  used 
by  writers  generally  hitherto  words  that  express  the 
conception  of  principal  correctly  and  explicitly.  It  is 
unnecessary,  therefore,  for  me  to  devote  much  space  to 
this  point.  "Why,"  asks  Bohm-Bawerk  on  page  139 
of  his  Capital  and  Interest,  "should  a  concrete  capital 
that  yields  a  great  return  not  be  highly  valued  on  that 
account  —  so  highly  that  its  capital  value  would  be 
equal  to  the  value  of  the  abundant  return  that  flows 
form  it?  Why,  e.g.,  should  a  boat  and  net  which, 
during  the  time  that  they  last,  help  to  procure  an  extra 
return  of  2700  fish,  not  be  considered  exactly  equal  in 
value  to  these  2700  fish  ?  But  in  that  case  —  in  all 
physical  productivity  —  there  would  be  no  surplus 
value."  To  this  there  is  no  answer. 

What,  then,  is  the  true  connection  between  productiv- 
ity, in  the  sense  of  the  usefulness  of  tools,  and  the 
premium  which  present  services  command  over  future 
services  of  the  same  nominal  value  ?  This  question  I 
have  really  answered  already,  but  it  will  do  no  harm  to 
answer  it  again  and  more  fully. 

In  the  first  place  what,  precisely,  do  we  mean  by  the 
usefulness  or  productivity  of  tools  ?  We  mean  that 
under  certain  circumstances  the  locking  up  for  a  time  of 
human  services,  that  is,  labor,  in  that  part  of  the  store- 
house of  nature's  causal  nexus  which  we  might  call  the 
laws  of  chemistry  and  physics,  results  in  the  receipt  with 
the  passage  of  time,  from  or  through  the  tools  in  which 
the*  services  are  locked  up,  of  services  nominally  more 
valuable  than  the  services  locked  up  would  have  been  if 
rendered  immediately  instead  of  being  thus  locked  up. 


148  A  THEORY  OF  INTEREST 

To  say  the  same  thing  more  briefly,  we  mean  that,  up 
to  a  certain  point  which  in  fact  has  never  been  reached, 
labor,  to  have  its  utmost  value  from  the  point  of  view  of 
the  society  of  the  passing  time,  must  be  employed  in 
processes  requiring  considerable  time  before  its  enjoy- 
able services  accrue  and  must  be  embodied  during  that 
considerable  time  in  "intermediate  products"  l  some  of 
which  are  called  tools. 

§  85.  We  may  now  consider  what  is  the  true  con- 
nection between  productivity,  thus  conceived,  and  the 
premium  which  present  services  -  command  over  future 
services  of  the  same  nominal  value.  It  is  this  :  produc- 
tivity, so  far  from  being  the  cause  of  the  premium  men- 
tioned, is  itself  caused  by  the  premium.  That  oppor- 
tunities to  secure  a  nominal  surplus  by  making  advances 
to  nature  still  remain  open,  in  other  words  that  an 
additional  tool  is  still  " productive,"  is  due  to  the  fact 
that  particular  persons  or  groups  of  persons,  who  are 
the  only 2  agents  that  could  have  eliminated  the  oppor- 
tunity by  making  an  additional  advance  to  nature,  have 
been  prevented  from  doing  so  by  the  fact  that  present 
services  were  more  valuable  to  them  than  future  services 
of  the  same  nominal  value. 

1  This  is  Bohm-Bawerk's  term.     See  p.  22  of  The  Positive  Theory  of 
Capital. 

2  As  we  have  seen,  the  indispensable  condition  of  taking  advantage 
of  one  of  these  opportunities  is  making  an  advance  to  nature,  locking 
up  services  for  a  time  in  the  storehouse  of  nature's  causal  nexus ;  the  in- 
dispensable condition  of  making  an  advance  an  advance    is  an  ad- 
vancer; and  the  advancer  cannot  be  the  "changing  society,"  but  must 
be  a  particular  person  or  group  of  persons. 


OTHER  THEORIES  OF  INTEREST  149 

"ABSTINENCE" 

§  86.  Many  writers,  notably  Senior,1  regard  absti- 
nence as  the  key  to  the  persistence  of  interest.  The  fol- 
lowing passages  will  give  an  understanding  of  Senior's 
views  on  this  point. 

"  Instruments  of  Production1' 

"Having  explained  the  nature  of  Production  and 
Consumption,  we  now  proceed  to  consider  the  Agents 
by  whose  intervention  Production  takes  place. 

"I.  LABOUR.  — The  primary  Instruments  of  Produc- 
tion are  Labour,  and  those  Agents  of  which  nature,  un- 
aided by  man,  affords  us  the  assistance. 

"Labour  is  the  voluntary  exertion  of  bodily  or  mental 
faculties  for  the  purpose  of  Production.  It  may  appear 
unnecessary  to  define  a  term  having  a  meaning  so  pre- 
cise and  so  generally  understood.  Peculiar  notions  re- 
specting the  causes  of  value  have,  however,  led  some 
Economists  to  employ  the  term  labour  in  senses  so  dif- 
ferent from  its  common  acceptation,  that  for  some  time 
to  come  it  will  be  dangerous  to  use  the  word  without 
explanation.  We  have  already  observed  that  many 
recent  writers  have  considered  value  as  solely  dependent 
on  labour.  When  pressed  to  explain  how  wine  in  a  cellar, 
or  an  oak  in  its  progress  from  a  sapling  to  a  tree,  could, 
on  this  principle,  increase  in  value,  they  replied  that 
they  considered  the  improvement  of  the  wine  and  the 
growth  of  the  tree  as  so  much  additional  labour  bestowed 

1  Political  Economy,  second  ed.,  London,  1850. 


150  A  THEORY  OF  INTEREST 

on  each.  We  do  not  quite  understand  the  meaning  of 
this  reply;  but  we  have  given  a  definition  of  labour, 
lest  we  should  be  supposed  to  include  in  it  the  unassisted 
operations  of  nature.  It  may  also  be  well  to  remind 
our  readers  that  this  definition  excludes  all  those  exer- 
tions which  are  not  intended,  immediately  or  through 
their  products,  to  be  made  the  subjects  of  exchange. 
A  hired  messenger  and  a  person  walking  for  his  amuse- 
ment, a  sportsman  and  a  gamekeeper,  the  ladies  at  an 
English  ball  and  a  company  of  Natch  girls  in  India, 
undergo  the  same  fatigues ;  but  ordinary  language  does 
not  allow  us  to  consider  those  as  undergoing  labour  who 
exert  themselves  for  the  mere  purpose  of  amusement. 

"II.  NATURAL  AGENTS.  —  Under  the  term  'the 
Agents  offered  to  us  by  nature,'  or,  to  use  a  shorter  ex- 
pression, 'Natural  Agents/  we  include  every  productive 
agent  so  far  as  it  does  not  derive  its  powers  from  the  act 
of  man. 

"The  term  'Natural  Agent'  is  far  from  being  a  con- 
venient designation,  but  we  have  adopted  it  partly 
because  it  has  been  already  made  use  of  in  this  sense 
by  eminent  writers,  and  partly  because  we  have  not 
been  able  to  find  one  less  objectionable.  The  principal 
of  these  agents  is  the  land,  with  its  mines,  its  rivers,  its 
natural  forests  with  their  wild  inhabitants,  and,  in  short, 
all  its  spontaneous  productions.  To  these  must  be 
added  the  ocean,  the  atmosphere,  light  and  heat,  and 
even  those  physical  laws,  such  as  gravitation  and  elec- 
tricity, by  the  knowledge  of  which  we  are  able  to  vary 
the  combinations  of  matter.  All  these  productive  agents 
have  in  general,  by  what  appears  to  be  an  inconvenient 


OTHER  THEORIES  OF  INTEREST  151 

synecdoche,  been  designated  by  the  term  '  land  ' ;  partly 
because  the  land,  as  a  source  of  profit,  is  the  most  im- 
portant of  those  which  are  susceptible  of  appropriation, 
but  chiefly  because  its  possession  generally  carries  with 
it  the  command  over  most  of  the  others.  And  it  is  to 
be  remembered  that,  though  the  powers  of  nature  are 
necessary  to  afford  a  substratum  for  the  other  instru- 
ments of  production  to  work  upon,  they  are  not  of  them- 
selves, when  universally  accessible,  causes  of  value. 
Limitation  in  supply  is,  as  we  have  seen,  a  necessary 
constituent  of  value ;  and  what  is  universally  accessible 
is  practically  unlimited  in  supply. 

"III.  ABSTINENCE.  —  But  although  Human  Labour, 
and  the  Agency  of  Nature,  independently  of  that  of 
man,  are  the  primary  Productive  Powers,  they  require 
the  concurrence  of  a  Third  Productive  Principle  to  give 
to  them  complete  efficiency.  The  most  laborious  popu- 
lation, inhabiting  the  most  fertile  territory,  if  they  de- 
voted all  their  labour  to  the  production  of  immediate 
results,  and  consumed  its  produce  as  it  arose,  would  soon 
find  their  utmost  exertions  insufficient  to  produce  even 
the  mere  necessaries  of  existence. 

"To  the  Third  Principle,  or  Instrument  of  Produc- 
tion, without  which  the  two  others  are  inefficient,  we 
shall  give  the  name  of  Abstinence :  a  term  by  which  we 
express  the  conduct  of  a  person  who  either  abstains 
from  the  unproductive  use  of  what  he  can  command,  or 
designedly  prefers  the  production  of  remote  to  that  of 
immediate  results. 

"It  was  to  the  effects  of  this  Third  Instrument  of 
Production  that  we  adverted,  when  we  laid  down,  as 


152  A  THEORY  OF  INTEREST 

the  third  of  our  elementary  propositions,  that  the 
Powers  of  Labour  and  of  the  other  Instruments  which 
produce  Wealth  may  be  indefinitely  increased  by  using 
their  Products  as  the  means  of  further  Production.  All 
our  subsequent  remarks  on  abstinence  are  a  develop- 
ment and  illustration  of  this  proposition;  we  say  de- 
velopment and  illustration,  because  it  can  scarcely  be 
said  to  require  formal  proof. 

"The  division  of  the  Instruments  of  Production  into 
three  great  branches  has  long  been  familiar  to  Economists. 
Those  branches  they  have  generally  termed  Labour, 
Land,  and  Capital.  In  the  principle  of  this  division  we 
agree ;  though  we  have  substituted  different  expres- 
sions for  the  second  and  third  branches.  We  have  pre- 
ferred the  term  Natural  Agents  to  that  of  Land,  to 
avoid  designating  a  whole  genus  by  the  name  of  one  of 
its  species :  a  practice  which  has  occasioned  the  other 
cognate  species  to  be  generally  slighted  and  often  for- 
gotten. We  have  substituted  the  term  'Abstinence' 
for  that  of  Capital  on  different  grounds. 

"The  term  'Capital'  has  been  so  variously  denned 
that  it  may  be  doubtful  whether  it  have  any  generally 
received  meaning.  We  think,  however,  that,  in  popular 
acceptation,  and  in  that  of  Economists  themselves,  when 
they  are  not  reminded  of  their  definitions,  that  word 
signifies  an  article  of  wealth,  the  result  of  human  exer- 
tion, employed  in  the  production  or  distribution  of  wealth. 
We  say  the  result  of  human  exertion,  in  order  to  exclude 
those  productive  instruments  to  which  we  have  given 
the  name  of  natural  agents,  and  which  afford  not  profit, 
in  the  scientific  sense  of  that  word,  but  rent. 


OTHER   THEORIES  OF  INTEREST  153 

"It  is  evident  that  Capital,  thus  defined,  is  not  a 
simple  productive  instrument;  it  is  in  most  cases  the 
result  of  all  the  three  productive  instruments  combined. 
Some  natural  agent  must  have  afforded  the  material, 
some  delay  of  enjoyment  must  in  general  have  reserved 
it  from  unproductive  use,  and  some  labour  must  in 
general  have  been  employed  to  prepare  and  preserve  it. 
By  the  word  Abstinence,  we  wish  to  express  that  agent, 
distinct  from  labour  and  the  agency  of  nature,  the  con- 
currence of«  which  is  necessary  to  the  existence  of  Capital, 
and  which  stands  in  the  same  relation  to  Profit  as  Labour 
does  to  Wages.  We  are  aware  that  we  employ  the  word 
Abstinence  in  a  more  extensive  sense  than  is  warranted  by 
common  usage.  Attention  is  usually  drawn  to  absti- 
nence only  when  it  is  not  united  with  labour.  It  is 
recognized  instantly  in  the  conduct  of  a  man  who  allows 
a  tree  or  a  domestic  animal  to  attain  its  full  growth ; 
but  it  is  less  obvious  when  he  plants  the  sapling  or  sows 
the  seed  corn.  The  observer's  attention  is  occupied  by 
the  labour,  and  he  omits  to  consider  the  additional 
sacrifice  made  when  labour  is  undergone  for  a  distant 
object.  This  additional  sacrifice  we  comprehend  under 
the  term  Abstinence ;  not  because  Abstinence  is  an 
unobjectionable  expression  for  it,  but  because  we  have 
not  been  able  to  find  one  to  which  there  are  not  still 
greater  objections.  We  once  thought  of  using  'provi- 
dence'; but  providence  implies  no  self-denial,  and  has 
no  necessary  connection  with  profit.  To  take  out  an 
umbrella  is  provident,  but  not  in  the  usual  sense  of  the 
word  profitable.  We  afterwards  proposed  'frugality,' 
but  frugality  implies  some  care  and  attention,  that  is  to 


154  A  THEORY  OF  INTEREST 

say,  some  labour ;  and  though  in  practice  Abstinence  is 
almost  always  accompanied  by  some  degree  of  labour, 
it  is  obviously  necessary  to  keep  them  separate  in  an 
analysis  of  the  instruments  of  production. 

"It  may  be  said  that  pure  Abstinence,  being  a  mere 
negation,  cannot  produce  positive  effects ;  the  same 
remark  might  as  well  be  applied  to  intrepidity,  or  even 
to  liberty;  but  who  ever  objected  to  their  being  con- 
sidered as  equivalent  to  active  agents?  To  abstain 
from  the  enjoyment  which  is  in  our  power,  or  to  seek 
distant  rather  than  immediate  results,  are  among  the 
most  painful  exertions  of  the  human  will.  It  is  true 
that  such  exertions  are  made,  and  indeed  are  frequent 
in  every  state  of  society,  except  perhaps  in  the  very 
lowest,  and  have  been  made  in  the  very  lowest,  for  society 
could  not  otherwise  have  improved ;  but  of  all  the  means 
by  which  man  can  be  raised  in  the  scale  of  being,  ab- 
stinence, as  it  is  perhaps  the  most  effective,  is  the  slowest 
in  its  increase,  and  the  least  generally  diffused.  Among 
nations,  those  that  are  the  least  civilized,  and  among 
the  different  classes  of  the  same  nation  those  which  are 
the  worst  educated,  are  always  the  most  improvident, 
and  consequently  the  least  abstinent. 

"CAPITAL.  — We  have  already  denned  Capital  to  be 
an  article  of  wealth,  the  result  of  human  exertion,  em- 
ployed in  the  production  or  distribution  of  wealth,  and 
we  have  observed  that  each  individual  article  of  capital 
is  in  general  the  result  of  a  combination  of  all  the  three 
great  instruments  of  production  —  labour,  abstinence, 
and  the  agency  of  nature."  1 

1  Work  cited,  pp.  57-60. 


OTHER   THEORIES  OF  INTEREST  155 

"In  the  second  class  we  have  the  words  Capital, 
Capitalist,  and  Profit.  These  terms  express  the  instru- 
ment, the  person  who  employs  or  exercises  it,  and  his 
remuneration;  but  there  is  no  familiar  term  to  express 
the  act,  the  conduct  of  which  profit  is  the  reward,  and 
which  bears  the  same  relation  to  profit  which  labour 
does  to  wages.  To  this  conduct  we  have  already  given 
the  name  of  Abstinence.  The  addition  of  this  term  will 
complete  the  nomenclature  of  the  second  class.  Capital 
is  an  article  of  wealth,  the  result  of  human  exertion, 
employed  in  the  production  or  distribution  of  Wealth. 
Abstinence  expresses  both  the  act  of  abstaining  from  the 
unproductive  use  of  capital,  and  also  the  similar  conduct 
of  the  man  who  devotes  his  labour  to  the  production  of 
remote  rather  than  of  immediate  results.  The  person 
who  so  acts  is  a  Capitalist,  the  reward  of  his  conduct  is 
Profit."  1 

"We  have  seen  that  Profit  is  the  remuneration  of 
abstinence,  and  that  abstinence  is  the  deferring  of 
enjoyment."  2 

§  87.  It  is  clear  from  the  second  passage  quoted  that 
what  Senior  terms  "Profit"  is  what  we  nowadays  term 
"interest."  Interest,  therefore,  according  to  Senior, 
is  that  part  of  the  income  of  society  which  is  produced 
by  "abstinence";  and  it  is  therefore  equitable  that  it 
should  be  received,  as  it  is  received,  by  members  of 
society  in  proportion  to  their  practice  of  "abstinence." 

To  what  extent  is  this  true  ? 

The  word  "abstinence,"  in  the  first  place,  is  not  quite 

1  Work  cited,  p.  89. 

2  Work  cited,  p.  185. 


156  A   THEORY  OF  INTEREST 

the  best  one  for  the  "deferring  of  enjoyment"  which  it 
is  made  by  Senior  to  cover.  Abstinence  suggests  going 
without  the  consumption  in  question  altogether  rather 
than  merely  deferring  it.  It  lent  itself  readily,  there- 
fore, to  the  attacks  of  such  men  as  Lassalle.1  "The 
profit  of  capital,"  exclaims  Lassalle,  "is  the  'wage  of 
abstinence.'  Happy,  even  priceless  expression !  The 
ascetic  millionaires  of  Europe  !  Like  Indian  penitents 
or  pillar  saints  they  stand :  on  one  leg,  each  on  his 
column,  with  straining  arm  and  pendulous  body  and 
pallid  looks,  holding  a  plate  towards  the  people  to  col- 
lect the  wages  of  their  Abstinence.  In  their  midst, 
towering  up  above  all  his  fellows,  as  head  penitent  and 
ascetic,  the  Baron  Rothschild  !  This  is  the  condition 
of  society  !  how  could  I  ever  so  much  misunderstand 
it!" 

Better  than  the  word  "abstinence"  is  one  suggested 
by  Professor  Silas  Macvane  in  the  Quarterly  Journal  of 
Economics  for  July,  1887,  and  adopted  by  Marshall  and 
others  since,  the  word  "  waiting."  The  deferring  of  con- 
sumption which  is  certainly  involved,  as  Senior  and  some 
of  his  predecessors  saw  clearly,  in  the  receipt  by  society 
of  the  surplus  we  call  interest,  is  fully  covered  by  the 
word  "  waiting  "  ;  and  yet  that  word  does  not  imply,  as 
the  word  "abstinence  "  does,  any  diminution  in  aggregate 
consumption. 

Suppose  the  word  "  waiting  "  substituted  for  the  word 

1  Lassalle's  attacks  on  abstinence  as  a  justification  for  the  receipt 
of  interest  by  capitalists  appeared  in  Kapiial  und  Arbeit,  Berlin,  1864, 
according  to  Bohm-Bawerk's  Capital  and  Interest,  p.  276,  from  which 
I  quote  the  passage  from  Lassalle  in  the  text. 


OTHER  THEORIES  OF  INTEREST 


157 


"abstinence  "  :  what  is  then  to  be  said  of  Senior's  theory  ? 
The  theory  would  then  be  true  so  far  as  it  goes,  but  it 
would  be  inadequate.  It  is  true  that  waiting  or  advanc- 
ing is  an  indispensable  condition  of  gaining  the  (nominal) 
surplus  called  interest.  It  is  also  equitable  that  who- 
ever supplies  this  indispensable  condition  of  the  nominal 
surplus  should  be  the  one  to  receive  the  nominal  surplus, 
or  that  every  one  should  receive  the  nominal  surplus 
that  he  has  produced  by  his  waiting  or  advancing.1 
But  no  theory  is  adequate  to  account  for  interest  that 
does  not  explain  just  why  the  supply  of  waiting  fails, 
age  after  age,  to  equal  the  demand  at  a  price  lower 
than  about  3  per  cent  of  the  principal.  If  waiting  pro- 
duces a  surplus  and  the  surplus  goes  to  those  who  wait, 
why  do  men  set  a  limit  to  their  waiting  before  they  have 
exhausted  all  the  opportunities  to  secure  the  surplus? 
Are  the  causes  of  the  setting  of  this  limit  where  it  is  set 
rational,  or  irrational,  or  both?  And  what  are  they? 
These  questions  —  to  say  nothing  of  others  that  no 
economist  could  have  been  expected  to  answer,  or  even 
to  ask,  in  Senior's  time  —  Senior  did  not  answer.  On 
the  whole  Senior's  theory  is  to  be  regarded  as  a  well- 
constructed  theory  essentially  true  so  far  as  it  went. 

PRODUCTIVITY  AND  WAITING 

§  88.  Some  recent  writers,  notably  Professor  T.  N. 
Carver,  explain  interest  somewhat  as  Senior  did,  except 
that  they  use  the  better  word  "waiting"  instead  of  "ab- 
stinence" and  that  they  explain  the  causal  connection  be- 
tween "productivity"  and  men's  dislike  of  waiting, 

1  On  this  point  see  also  §  90  below. 


158  A  THEORY  OF  INTEREST 

making  use,  in  connection  with  productivity,  of  the  sig- 
nificant conception  of  the  margin  brought  into  economic 
theory  by  Gossen,1  Jevons,2  Carl  Menger,3  Walras,4  and 
others.5  Pages  219-232  of  Professor  Carver's  Distribu- 
tion of  Wealth6  may  be  referred  to  as  showing  clearly  this 
considerable  advance  beyond  the  theory  of  Senior. 

Even  in  the  hands  of  so  recent  and  so  able  a  writer 
as  Carver,  however,  the  problem  of  interest  is  not  quite 
solved.  Like  all  his  predecessors,  as  it  seems  to  me, 
Carver  fails  to  discover  the  true  conception  of  the  prin- 
cipal, without  which  there  can  be  no  true  conception  of 
the  surplus  above  principal  that  is  called  interest  and 
consequently  no  satisfactory  analysis  of  the  whole 
problem.  At  times,  to  be  sure,  as  on  page  226,  where 
he  says  that  capital's  "earning  or  its  marginal  produc- 
tivity would,  during  its  lifetime,  just  cover  its  cost," 
he  appears  to  conceive  the  principal  in  terms  of  value 
and  cost  instead  of  in  terms  of  amount  and  quality; 
but  for  the  most  part  the  amount  and  quality  conception 
satisfies  him.7 

1 H.  H.  Gossen :  Entwickelung  der  Gesetze  des  menschlichen  Verkehrs, 
1854. 

2  W.  S.  Jevons :  Theory  of  Political  Economy,  first  ed.  1871. 

3  Carl  Menger:  Grundsdtze  der   Volkswirthschaftslehre,   1871. 

4  Leon  Walras :  Elements  d' Economic  Pure,  1874. 

8  For  a  detailed  account  of  the  history  of  the  doctrine  of  marginal 
utility  see  a  note  on  pp.  78  and  79  of  Bruce's  translation  of  M. 
Pantaleoni's  Pure  Economics,  London,  Macmillan,  1898. 

6  New  York,  The  Macmillan  Co.,  1904. 

7  See,    for   example,    these    expressions:    "more"   and    "amount" 
(p.  129);  "total  product,"  "amount,"  "more  work,"  "largest  product," 
"maximum  per  man,"  and  "maximum  per  loom"  (p.  220);  "more," 
"less,"  "amount,"  and  "larger  number  of  plows"  (p.  221).    It  is  with 


OTHER   THEORIES  OF  INTEREST  159 

"EXPLOITATION" 

§  89.  Some  writers,  of  whom  Karl  Marx  has  in- 
fluenced the  largest  number  of  persons,  have  explained 
interest  as  due  to  the  exploitation  of  employees  by  their 
employers.  Marx's  theory,  developed  in  full  in  his 
work,  Das  Kapital,  is  expressed  briefly  also  in  the  fol- 
lowing passages  quoted  from  a  paper 1  read  by  him 
before  the  General  Council  of  the  International  Work- 
ingmen's  Association  in  1865.  The  italics  are  those  of 
the  Century  Press  edition. 

LABOUR  POWER 

"Having  now,  as  far  as  it  could  be  done  in  such  a 
cursory  manner,  analysed  the  nature  of  Value,  of  the 
Value  of  any  commodity  whatever,  we  must  turn  our 
attention  to  the  specific  Value  of  Labour.  And  here, 
again,  I  must  startle  you  by  a  seeming  paradox.  All  of 
you  feel  sure  that  what  you  daily  sell  is  your  Labour; 
that,  therefore,  Labour  has  a  Price,  and  that,  the  price 
of  a  commodity  being  only  the  monetary  expression  of 
its  value,  there  must  certainly  exist  such  a  thing  as  the 
Value  of  Labour.  However,  there  exists  no  such  thing 
as  the  Value  of  Labour  in  the  common  acceptance  of  the 
word.  We  have  seen  that  the  amount  of  necessary 
Labour  crystallised  in  a  community  constitutes  its  value. 

such  terms  as  these,  and  without  the  use  of  those  covering  any  sort  of 
value,  that  Carver  explains  "marginal  productivity."  As  we  have  seen, 
productivity  can  be  explained  correctly  only  in  terms  of  value. 

1  Published  under  the  title  of  Value,  Price,  and  Profit  by  the  Twen- 
tieth Century  Press,  London,  1908.  The  passage  quoted  is  from  pp. 
28-35- 


160  A  THEORY  OF  INTEREST 

Now,  applying  this  notion  of  value,  how  could  we 
define,  say,  the  value  of  a  ten  hours'  working  day? 
How  much  labour  is  contained  in  that  day  ?  Ten  hours' 
labour.  To  say  that  the  value  of  a  ten  hours'  working 
day  is  equal  to  ten  hours'  labour,  or  the  quantity  of 
labour  contained  in  it,  would  be  tautological,  and,  more- 
over, a  nonsensical  expression.  Of  course,  having  once 
found  out  the  true  hidden  sense  of  the  expression  '  Value 
of  Labour,'  we  shall  be  able  to  interpret  this  irrational, 
and  seemingly  impossible  application  of  value,  in  the 
same  way  that,  having  once  made  sure  of  the  real  move- 
ment of  the  celestial  bodies,  we  shall  be  able  to  explain 
their  apparent  or  merely  phenomenal  movements. 

"What  the  workingman  sells  is  not  directly  his 
Labour,  but  his  Labour  power,  the  temporary  disposal  of 
which  he  makes  over  to  the  capitalist.  This  is  so  much 
the  case  that  —  I  do  not  know  whether  by  the  English 
laws,  but  certainly  by  some  Continental  laws  —  the 
maximum  time  is  fixed  for  which  a  man  is  allowed  to 
sell  his  labour  power.  If  allowed  to  do  so  for  any  in- 
definite period  whatever,  slavery  would  be  immediately 
restored.  Such  a  sale,  if  it  comprised  his  lifetime,  for 
example,  would  make  him  at  once  the  lifelong  slave  of 
his  employer. 

"One  of  the  oldest  economists  and  most  original 
philosophers  of  England  —  Thomas  Hobbes  —  has  al- 
ready, in  his  'Leviathan/  instinctively  hit  upon  this 
point  overlooked  by  all  his  successors.  He  says  :  '  The 
"value  or  worth  of  a  man  is,  as  in  all  other  things,  his 
price  —  that  is,  so  much  as  would  be  given  for  the  Use 
of  his  Power.' 


OTHER  THEORIES  OF  INTEREST  161 

"Proceeding  from  this  basis,  we  shall  be  able  to  deter- 
mine the  Value  of  Labour  as  that  of  all  other  commodities. 

"But  before  doing  so,  we  might  ask,  how  does  this 
strange  phenomenon  arise,  that  we  find  on  the  market 
a  set  of  buyers  possessed  of  land,  machinery,  raw  ma- 
terial, and  the  means  of  subsistence,  all  of  them,  save 
land  in  its  crude  state,  the  products  of  labour,  and,  on 
the  other  hand,  a  set  of  sellers  who  have  nothing  to  sell 
except  their  labour  power,  their  working  arms  and 
brains?  That  the  one  set  buy  continually  in  order  to 
make  a  profit  and  enrich  themselves,  while  the  other 
set  continually  sell  in  order  to  earn  their  livelihood? 
The  inquiry  into  this  question  would  be  an  inquiry 
into  what  the  economists  call  'Previous  or  Original 
Accumulation,'  but  which  ought  to  be  called  Original 
Expropriation.  We  should  find  that  this  so-called 
Original  Accumulation  means  nothing  but  a  series  of 
historical  processes,  resulting  in  a  Decomposition  of  the 
Original  Union  existing  between  the  Labouring  Man 
and  his  Instruments  of  Labour.  Such  an  inquiry,  how- 
ever, lies  beyond  the  pale  of  my  present  subject.  The 
Separation  between  the  Man  of  Labour  and  the  Instru- 
ments of  Labour  once  established,  such  a  state  of  things 
will  maintain  itself  and  reproduce  itself  upon  a  con- 
stantly increasing  scale,  until  a  new  and  fundamental 
revolution  in  the  mode  of  production  shall  again  overturn 
it,  and  restore  the  original  union  in  a  new  historical  form. 

"What,  then,  is  the  Value  of  Labour  Power? 

"Like  that  of  every  other  commodity,  its  value  is 
determined  by  the  quantity  of  labour  necessary  to  pro- 
duce it.  The  labour  power  of  a  man  exists  only  in  his 


162  A  THEORY  OF  INTEREST 

living  individuality.  A  certain  mass  of  necessaries  must 
be  consumed  by  a  man  to  grow  up  and  maintain  his  life. 
But  the  man,  like  the  machine,  will  wear  out,  and  must 
be  replaced  by  another  man.  Besides  the  mass  of 
necessaries  required  for  his  own  maintenance,  he  wants 
another  amount  of  necessaries  to  bring  up  a  certain  quota 
of  children  that  are  to  replace  him  on  the  labour  market 
and  to  perpetuate  the  race  of  labourers.  Moreover,  to 
develop  his  labour  power,  and  acquire  a  given  skill, 
another  amount  of  values  must  be  spent.  For  our  pur- 
pose it  suffices  to  consider  only  average  labour,  the  costs 
of  whose  education  and  development  are  vanishing  mag- 
nitudes. Still  I  must  seize  upon  this  occasion  to  state 
that,  as  the  costs  of  producing  labour  powers  of  different 
quality  differ,  so  must  differ  the  values  of  the  labour 
powers  employed  in  different  trades.  The  cry  for  an 
equality  of  wages  rests,  therefore,  upon  a  mistake,  is  an 
insane  wish  never  to  be  fulfilled.  It  is  an  offspring  of 
that  false  and  superficial  radicalism  that  accepts  premises 
and  tries  to  evade  conclusions.  Upon  the  basis  of  the 
wages  system  the  value  of  labour  power  is  settled  like 
that  of  every  other  commodity ;  and  as  different  kinds 
of  labour  powers  have  different  values,  or  require  dif- 
ferent quantities  of  labour  for  their  production,  they 
must  fetch  different  prices  in  the  labour  market.  To 
clamour  for  equal  or  even  equitable  retribution  on  the  basis 
of  the  wages  system  is  the  same  as  to  clamour  for  free- 
dom on  the  basis  of  the  slavery  system.  What  you  think 
just  or  equitable  is  out  of  the  question.  The  question 
is :  What  is  necessary  and  unavoidable  with  a  given 
system  of  production? 


OTHER  THEORIES  OF  INTEREST  163 

"After  what  has  been  said,  it  will  be  seen  that  the 
value  of  labour  power  is  determined  by  the  value  of  the 
necessaries  required  to  produce,  develop,  maintain,  and 
perpetuate  the  labour  power. 

PRODUCTION  OF  SURPLUS  VALUE 

"Now  suppose  that  the  average  amount  of  the  daily 
necessaries  of  a  labouring  man  require  six  hours  of 
average  labour  for  their  production.  Suppose,  moreover, 
six  hours  of  average  labour  to  be  also  realised  in  a 
quantity  of  gold  equal  to  35.  Then  33.  would  be  the 
Price,  or  the  monetary  expression  of  the  Daily  Value  of 
that  man's  Labour  Power.  If  he  worked  daily  six  hours 
he  would  daily  produce  a  value  sufficient  to  buy  the 
average  amount  of  his  daily  necessaries,  or  to  maintain 
himself  as  a  labouring  man. 

"But  our  man  is  a  wages  labourer.  He  must,  there- 
fore, sell  his  labour  power  to  a  capitalist.  If  he  sells  it 
at  35.  daily,  or  i8s.  weekly,  he  sells  it  at  its  value.  Sup- 
pose him  to  be  a  spinner.  If  he  works  six  hours  daily 
he  will  add  to  the  cotton  a  value  of  35.  daily.  This 
value,  daily  added  by  him,  would  be  an  exact  equivalent 
for  the  wages,  or  the  price  of  his  labour  power,  received 
daily.  But  in  that  case,  no  surplus  value  or  surplus 
produce  whatever  would  go  to  the  capitalist.  Here, 
then,  we  come  to  the  rub. 

"In  buying  the  labour  power  of  the  workman,  and 
paying  its  value,  the  capitalist,  like  every  other  pur- 
chaser, has  acquired  the  right  to  consume  or  use  the 
commodity  bought.  You  consume  or  use  the  labour 
power  of  a  man  by  making  him  work,  as  you  consume 


164  A  THEORY  OF  INTEREST 

or  use  a  machine  by  making  it  run.  By  buying  the 
daily  or  weekly  value  of  the  labour  power  of  the  work- 
man, the  capitalist  has,  therefore,  acquired  the  right  to 
use  or  make  that  labour  power  work  during  the  whole 
day  or  week.  The  working  day  or  the  working  week  has, 
of  course,  certain  limits,  but  into  this  we  shall  afterwards 
look  more  closely. 

"For  the  present  I  want  to  turn  your  attention  to  one 
decisive  point. 

"The  value  of  the  labour  power  is  determined  by  the 
quantity  of  labour  necessary  to  maintain  or  reproduce 
it,  but  the  use  of  that  labour  power  is  only  limited  by 
the  active  energies  and  physical  strength  of  the  labourer. 
The  daily  or  weekly  value  of  the  labour  power  is  quite 
distinct  from  the  daily  or  weekly  exercise  of  that  power, 
the  same  as  the  food  a  horse  wants  and  the  time  it  can 
carry  the  horseman  are  quite  distinct.  The  quantity 
of  labour  by  which  the  value  of  the  workman's  labour 
power  is  limited,  forms  by  no  means  a  limit  to  the  quan- 
tity of  labour  which  his  labour  power  is  apt  to  perform. 
Take  the  example  of  our  spinner.  We  have  seen  that, 
to  daily  reproduce  his  labour  power,  he  must  daily  re- 
produce a  value  of  three  shillings,  which  he  will  do  by 
working  six  hours  daily.  But  this  does  not  disable  him 
from  working  ten  or  twelve  or  more  hours  a  day.  But 
by  paying  the  daily  or  weekly  value  of  the  spinner's 
labour  power  the  capitalist  has  acquired  the  right  of 
using  that  labour  power  during  the  whole  day  or  week. 
He  will,  therefore,  make  him  work  say,  daily,  twelve 
hours.  Over  and  above  the  six  hours  required  to  replace 
his  wages,  or  the  value  of  his  labour  power,  he  will, 


OTHER  THEORIES  OF  INTEREST  165 

therefore,  have  to  work  six  other  hours,  which  I  shall 
call  hours  of  surplus  labour,  which  surplus  labour  will 
realise  itself  in  a  surplus  value  and  a  surplus  produce. 
If  our  spinner,  for  example,  by  his  daily  labour  of  six 
hours,  added  three  shillings'  value  of  the  cotton,  a  value 
forming  an  exact  equivalent  to  his  wages,  he  will,  in 
twelve  hours,  add  six  shillings'  worth  to  the  cotton,  and 
produce  a  proportional  surplus  of  yarn.  As  he  has  sold 
his  labour  power  to  the  capitalist,  the  whole  value  of 
produce  created  by  him  belongs  to  the  capitalist,  the 
owner  pro  tern,  of  his  labour  power.  By  advancing  three 
shillings,  the  capitalist  will,  therefore,  realise  a  value 
of  six  shillings,  because  advancing  a  value  in  which  six 
hours  of  labour  are  crystallised,  he  will  receive  in  return 
a  value  in  which  twelve  hours  of  labour  are  crystallised. 
By  repeating  this  same  process  daily,  the  capitalist 
will  daily  advance  three  shillings  and  daily  pocket  six 
shillings,  one  half  of  which  will  go  to  pay  wages  anew, 
and  the  other  half  of  which  will  form  surplus  value,  for 
which  the  capitalist  pays  no  equivalent.  It  is  this  sort 
of  exchange  'between  capital  and  labour  upon  which  capi- 
talist production,  or  the  wages  system,  is  founded,  and 
which  must  constantly  result  in  reproducing  the  work- 
ingman  as  a  workingman,  and  the  capitalist  as  a  capi- 
talist. 

"  The  rate  of  surplus  value,  all  other  circumstances  re- 
maining the  same,  will  depend  on  the  proportion  between 
that  part  of  the  working  day  necessary  to  reproduce  the 
value  of  the  labour  power  and  the  surplus  time  or  surplus 
labour  performed  for  the  capitalist.  It  will,  therefore, 
depend  on  the  ratio  in  which  the  working  day  is  pro- 


1 66  A   THEORY   OF  INTEREST 

longed  over  and  above  that  extent  by  which  the  working- 
man  would  only  reproduce  the  value  of  his  labour 
power,  or  replace  his  wages. 

Value  of  Labour 

"We  must  now  return  to  the  expression,  'Value,  or 
Price  of  Labour.' 

"We  have  seen  that,  in  fact,  it  is  only  the  value  of 
the  labour  power,  measured  by  the  values  of  commodi- 
ties necessary  for  its  maintenance.  But  since  the  work- 
man receives  his  wages  after  his  labour  is  performed, 
and  knows,  moreover,  that  what  he  actually  gives  to 
the  capitalist  is  his  labour,  the  value  or  price  of  his 
labour  power  necessarily  appears  to  him  as  the  price  or 
value  of  his  labour  itself.  If  the  price  of  his  labour  power 
is  three  shillings,  in  which  six  hours  of  labour  are  realised, 
and  if  he  works  twelve  hours,  he  necessarily  considers 
these  three  shillings  as  the  value  or  price  of  twelve  hours 
of  labour,  although  these  twelve  hours  of  labour  realise 
themselves  in  a  value  of  six  shillings.  A  double  conse- 
quence flows  from  this. 

"Firstly.  The  value  or  price  of  the  labour  power  takes 
the  semblance  of  the  price  or  value  of  labour  itself,  al- 
though, strictly  speaking,  value  and  price  of  labour  are 
senseless  terms. 

"Secondly.  Although  one  part  only  of  the  work- 
man's daily  labour  is  paid,  while  the  other  part  is  unpaid, 
and  while  that  unpaid  or  surplus  labour  constitutes 
exactly  the  fund  out  of  which  surplus  value  or  profit  is 
formed,  it  seems  as  if  the  aggregate  labour  was  paid 
labour. 


OTHER   THEORIES  OF  INTEREST  167 

"This  false  appearance  distinguishes  wages  labour  from 
other  historical  forms  of  labour.  On  the  basis  of  the 
wages  system  even  the  unpaid  labour  seems  to  be  paid 
labour.  With  the  slave,  on  the  contrary,  even  that  part 
of  his  labour  which  is  paid  appears  to  be  unpaid.  Of 
course,  in  order  to  work  the  slave  must  live,  and  one 
part  of  his  working  day  goes  to  replace  the  value  of  his 
own  maintenance.  But  since  no  bargain  is  struck 
between  him  and  his  master,  and  no  acts  of  selling  and 
buying  are  going  on  between  the  two  parties,  all  his 
labour  seems  to  be  given  away  for  nothing. 

"Take,  on  the  other  hand,  the  peasant  serf,  such  as 
he,  I  might  say,  until  yesterday  existed  in  the  whole 
East  of  Europe.  This  peasant  worked,  for  example, 
three  days  for  himself  on  his  own  field  or  the  field  allotted 
to  him,  and  the  three  subsequent  days  he  performed 
compulsory  and  gratuitous  labour  on  the  estate  of  his 
lord.  Here,  then,  the  paid  and  unpaid  parts  of  labour 
were  sensibly  separated,  separated  in  time  and  space ; 
and  our  Liberals  overflowed  with  moral  indignation  at 
the  preposterous  notion  of  making  a  man  work  for 
nothing. 

"In  point  of  fact,  however,  whether  a  man  works  three 
days  of  the  week  for  himself  on  his  own  field  and  three 
days  for  nothing  on  the  estate  of  his  lord,  or  whether 
he  works  in  the  factory  or  the  workshop  six  hours  daily 
for  himself  and  six  for  his  employer,  comes  to  the  same, 
although  in  the  latter  case  the  paid  and  unpaid  portions 
of  labour  are  inseparably  mixed  up  with  each  other,  and 
the  nature  of  the  whole  transaction  is  completely  masked 
by  the  intervention  of  a  contract  and  the  pay  received  at 


1 68  A  THEORY  OF  INTEREST 

the  end  of  the  week.  The  gratuitous  labour  appears  to 
be  voluntarily  given  in  the  one  instance,  and  to  be  com- 
pulsory in  the  other.  That  makes  all  the  difference. 

"In  using  the  words  'value  of  labour'  I  shall  only 
use  them  as  a  popular  slang  term  for  ''value  of  labour 
power.'' 

PROFIT  is  MADE  BY   SELLING  A  COMMODITY  AT   ITS 

VALUE 

"Suppose  an  average  hour  of  labour  to  be  realised  in 
a  value  equal  to  sixpence,  or  twelve  average  hours  of 
labour  to  be  realised  in  six  shillings.  Suppose,  further, 
the  value  of  labour  to  be  three  shillings  or  the  produce 
of  six  hours'  labour.  If,  then,  in  the  raw  material, 
machinery,  and  so  forth,  used  up  in  a  commodity, 
twenty-four  hours  of  average  labour  were  realised,  its 
value  would  amount  to  twelve  shillings.  If,  moreover, 
the  workman  employed  by  the  capitalist  added  twelve 
hours  of  labour  to  those  means  of  production,  these 
twelve  hours  would  be  realised  in  an  additional  value  of 
six  shillings.  The  total  value  of  the  product  would,  there- 
fore, amount  to  thirty-six  hours  of  realised  labour,  and 
be  equal  to  eighteen  shillings.  But  as  the  value  of 
labour,  or  the  wages  paid  to  the  workman,  would  be 
three  shillings  only,  no  equivalent  would  have  been  paid 
by  the  capitalist  for  the  six  hours  of  surplus  labour  worked 
by  the  workman,  and  realised  in  the  value  of  the  com- 
modity. By  selling  this  commodity  at  its  value  for 
eighteen  shillings,  the  capitalist  would,  therefore,  realise 
a  value  of  three  shillings,  for  which  he  had  paid  no 
equivalent.  These  three  shillings  would  constitute  the 


OTHER  THEORIES  OF  INTEREST  169 

surplus  value  or  profit  pocketed  by  him.  The  capitalist 
would,  consequently,  realise  the  profit  of  three  shillings, 
not  by  selling  his  commodity  at  a  price  over  and  above 
its  value,  but  by  selling  it  at  its  real  value. 

"The  value  of  a  commodity  is  determined  by  the 
total  quantity  of  labour  contained  in  it.  But  part  of  that 
quantity  of  labour  is  realised  in  a  value  for  which  an 
equivalent  has  been  paid  in  the  form  of  wages ;  part  of 
it  is  realised  in  a  value  for  which  no  equivalent  has  been 
paid.  Part  of  the  labour  contained  in  the  commodity 
is  paid  labour ;  part  is  unpaid  labour.  By  selling,  there- 
fore, the  commodity  at  its  value  —  that  is,  as  the  crystal- 
lisation of  the  total  quantity  of  labour  bestowed  upon  it, 
the  capitalist  must  necessarily  sell  it  at  a  profit.  He  sells 
not  only  what  has  cost  him  an  equivalent,  but  HE  SELLS 
ALSO  WHAT  HAS  COST  HIM  NOTHING,  although 
it  has  cost  his  workman  labour.  The  cost  of  the  com- 
modity to  the  capitalist  and  its  real  cost  are  different 
things.  I  repeat,  therefore,  that  normal  and  average 
profits  are  made  by  selling  commodities  not  above,  but 
at  their  real  values. 

THE  DIFFERENT   PARTS  INTO  WHICH  SURPLUS  VALUE 
is  DECOMPOSED 

"The  surplus  value,  or  that  part  of  the  total  value  of 
the  commodity  in  which  the  surplus  labour  or  unpaid 
labour  of  the  workingman  is  realised,  I  call  Profit.  The 
whole  of  that  profit  is  not  pocketed  by  the  employing 
capitalist.  The  monopoly  of  land  enables  the  land- 
lord to  take  one  part  of  that  surplus  value,  under  the 
name  of  rent,  whether  the  land  is  used  for  agricultural 


1 70  A  THEORY  OF  INTEREST 

buildings  or  railways,  or  for  any  other  productive  pur- 
pose. On  the  other  hand,  the  very  fact  that  the  pos- 
session of  the  instruments  of  labour  enables  the  employ- 
ing capitalist  to  produce  a  surplus  value,  or,  what  comes 
to  the  same,  to  appropriate  to  himself  a  certain  amount  of 
unpaid  labour,  enables  the  owner  of  the  means  of  labour, 
which  he  lends  wholly  or  partly  to  the  employing  capi- 
talist —  enables,  in  one  word,  the  money-lending  capi- 
talist to  claim  for  himself  under  the  name  of  interest 
another  part  of  that  surplus  value,  so  that  there  remains 
to  the  employing  capitalist  as  such  only  what  is  called 
industrial  or  commercial  profit. 

"By  what  laws  this  division  of  the  total  amount  of 
surplus  value  amongst  those  three  categories  of  people 
is  regulated,  is  a  question  quite  foreign  to  our  subject. 
This  much,  however,  results  from  what  has  been  stated. 

"Rent,  Interest,  and  Industrial  Profit  are  only  different 
names  for  different  parts  of  the  surplus  value  of  the  com- 
modity, or  the  unpaid  labour  enclosed  in  it,  and  they  are 
equally  derived  from  this  source,  and  from  this  source 
alone." 

§  90.  This  theory,  the  exploitation  theory  as  it  is 
usually  called,  is  erroneous  in  its  main  tenets.  Its 
prime  error,  which  vitiates  the  whole  argument  above 
and  a  large  part  of  the  whole  Marxian  philosophy,  is  the 
assumption  that  although  competition  would  reduce  the 
wages  of  laborers  to  equality  with  the  cost  of  reproduc- 
ing the  laborers,  it  would  not  reduce  the  price  of  the 
product  to  the  cost  of  producing  it.  In  the  absence  of 
monopoly  —  and  monopoly  is  not  necessarily  involved 
in  Marx's  theory  —  competition  among  employers  would 


OTHER  THEORIES  OF  INTEREST  171 

cut  the  price  of  the  commodities  or  services  produced 
by  each  employee  from  six  shillings  down,  down,  until 
in  the  case  of  the  marginal  employer,  that  is,  the  em- 
ployer to  whom  it  was  barely  worth  while  to  continue 
producing,  it  was  just  three  shillings.  This  is  on  the 
supposition  that  no  waiting  or  advancing  is  required  in 
the  process  of  production.  Then  the  only  "profits"  left 
to  any  of  the  employers  would  be  the  difference  between 
what  each  could  produce  and  what  the  marginal  employer 
could  produce  at  the  same  cost ;  and  those  profits  would 
obviously  be  in  the  nature  of  wages  for  superior  directive 
ability. 

But  suppose  —  what  is  actually  the  case  in  virtually 
all  modern  production  —  that  a  considerable  nominal 
surplus  arises  from  keeping  services  to  a  considerable 
nominal  value  locked  up,  during  the  process  of  produc- 
tion in  question,  in  the  form  of  buildings,  tools,  machines, 
horses,  office  furniture,  etc.  Then  the  employers  or 
others  will  be  induced  to  make  advances  to  secure  this 
nominal  surplus  more  and  more  until  the  (declining) 
value  to  the  advancers  of  another  increment  of  advances 
ceases  to  be  greater  than  its  (rising)  cost  to  the  ad- 
vancers. And  those  advances  will  command  as  a  price 
the  nominal  surplus  which  at  the  margin  they  produce. 
This  nominal  surplus  will  be  received  not  at  all  by  em- 
ployers in  their  capacity  of  employers,  but  by  advancers 
(savers,  capitalists),  whether  they  happen  to  be  also  the 
employers  or  not. 

If  Marx's  theory  were  true,  we  should  find  the  profits1 

1 1  use  the  word  in  the  very  wide  popular  sense  here,  to  include  rent 
of  land,  "rent  of  ability,"  interest,  and  wages  of  management. 


172  A  THEORY  OF  INTEREST 

of  manufacturers  varying  not  only  with  the  efficiency 
of  their  management  and  with  the  advantages  they  may 
have  through  some  degree  of  monopoly,  but  also  with 
the  number  of  employees  they  hire,  the  amount  of  the 
daily  wages  they  have  to  pay  them,  and  the  length  of  the 
working  day.  But  we  do  not  find  their  profits  varying 
thus  at  all :  we  find  them,  on  the  other  hand,  varying 
with  the  employer's  efficiency  of  management,  with  his 
advantages  from  monopoly,  and  with  the  amount  of  the 
advances,  reckoned  as  I  have  reckoned  them,1  that  he 
or  somebody  else  has  to  make  in  order  to  manufacture 
the  products  in  question  with  as  little  cost  as  possible, 
reckoning  the  interest  on  these  advances  as  a  cost  or  as 
the  equivalent  of  a  cost.  And  we  find  that  that  ele- 
ment of  the  manufacturer's  profits  which  is  interest,  that 
is,  nominal  surplus  due  to  advancing  the  principal,  goes 
into  the  pocket  of  whoever  produces  it  by  advancing  the 
principal,  regardless  of  whether  he  employs  any  wage 
laborers  or  not. 

"No  surplus  value  or  surplus  product  whatever  would 
go  to  the  capitalist,"  says  Marx  near  the  beginning  of  the 
passage  reprinted  above,  if  the  capitalist  cotton-manu- 
facturer paid  his  spinners  the  full  value  of  their  contribu- 
tion to  the  value  of  the  cloth.  This,  as  we  have  seen,  is 
completely  erroneous.  The  capitalist,  whether  manufac- 
turer also  or  merely  a  capitalist  who  lends  to  the  manufac- 
turer and  perhaps  holds  bonds  on  the  business,  can  certainly 
secure  the  nominal  surplus  called  interest  even  when  every 

1  That  is,  reckoning  the  amount  of  an  advance  as  a  thing  of  three 
dimensions ;  I  think  it  necessary  to  warn  the  reader  once  more  that  an 
advance  is  not  to  be  confused  with  the  services  advanced. 


OTHER  THEORIES  OF  INTEREST  173 

wage-earner  in  the  business  is  paid  the  full  value  of  what 
he  contributes  to  it. 

It  may  be  replied,  of  course,  that  without  the  coopera- 
tion of  labor  the  capital  used  in  a  cotton  factory  could 
not  possibly  produce  anything  of  value.  But  it  could 
be  rejoined  with  equal  truth  that  on  the  other  hand  with- 
out the  advances  supplied  by  the  "capitalists"  the  labor- 
ers could  not  produce  cotton  cloth  having  more  than  a 
trifling  value  in  comparison  with  what  they  can  produce 
with  the  cooperation  of  the  advancers.  It  is  just  as  un- 
fair to  say  that  the  laborers  deserve  all  the  product  as 
it  is  to  say  that  the  advancers  (capitalists)  deserve  nearly 
all  of  it.  The  reasonable  view  is  that  the  laborers  de- 
serve wages  equal  to  the  value  of  the  marginal  unit 
of  their  labor  under  the  conditions  of  industry  actually 
present,  which  is  normally  1  just  what  they  get,  and  that 
the  advancers  deserve  the  nominal  surplus  which  the 
marginal  unit  of  their  advances  creates,  which  is  nor- 
mally just  what  they  get. 

§  91.  If  any  reader  is  still  in  doubt  whether  Marx's 
theory  may  not,  somehow,  be  true,  let  him  consider  the 
case  of  a  Crusoe  on  his  island  before  the  appearance  of 
his  man  Friday.  Even  Crusoe  alone  on  his  island  could 
earn  interest  by  making  advances.  He  frequently  has 

1  In  the  sense  of  the  words  "  normally  "  denned  in  §  18.  Usually,  of 
course,  wage-laborers  get  less  than  they  would  get  if  normal  conditions 
prevailed :  private  appropriation  of  socially  created  values,  notably 
those  of  favored  land  sites,  private  appropriation  of  the  monopoly 
element  of  prices  boosted  by  legal  limitation  of  the  freedom  of  the  market 
under  the  so-called  "protective  tariff"  system,  and  many  less  easily 
avoidable  aberrations  from  normal  conditions  prevent  wage-earners 
from  receiving  what  they  ought  to. 


174  A  THEORY  OF  INTEREST 

occasion,  we  may  suppose,  to  cross,  at  the  cost  of  con- 
siderable discomfort,  a  certain  brook.  The  cost  of  bridg- 
ing the  brook  is  much  greater,  let  us  say,  than  that  of 
crossing  it  twice  —  and  he  will  not  have  occasion  to  cross 
it  more  than  once  during  the  time  required  to  bridge  it 
-  but  much  less  than  that  of  crossing  it  as  many  times 
as  he  will  have  occasion  to  cross  it  before  the  bridge 
wears  out  or  even  needs  repairs.  The  case  stands, 
then,  thus.  If  he  builds  the  bridge  and  enjoys  the  use 
of  it  for  a  long  time,  say  until  it  needs  repairs,  he  makes, 
from  the  point  of  view  of  pleasure  and  pain,  a  net  loss 
while  building  the  bridge  but  a  net  gain  in  the  end.  He 
is  confronted,  therefore,  with  precisely  the  same  problem 
that  confronts  the  wage  worker  in  a  cotton  factory  who 
considers  whether  or  not  he  will  buy  a  hundred  dollar 
5  %  bond  issued  for  the  purchase  of  needed  machinery  by 
the  company  for  which  he  is  working.  If  Crusoe  invests, 
and  uses  the  bridge  long  enough,  he  makes  a  net  gain ; 
but  if  he  invests,  and  does  not  use  the  bridge  long  enough, 
he  makes  a  net  loss.  If  the  wage  worker  invests,  and 
enjoys  his  $5  a  year  of  interest  long  enough,  he  makes 
a  net  gain ;  but  if  he  invests,  and  does  not  enjoy  the  $5 
a  year  long  enough,  he  makes  a  net  loss.  Let  us  sup- 
pose that  each  man  makes  the  investment  mentioned. 
In  doing  so  each  eliminates  one  of  the  best  remaining 
opportunities  to  secure  a  surplus  by  making  an  advance 
to  nature.  Suppose,  now,  that  after  a  while  Crusoe  has 
eliminated  (by  taking  advantage  of  them)  so  many  of 
the  opportunities  open  to  him  to  secure  a  surplus  by 
making  advances  to  nature  that  the  best  opportunity 
remaining,  though  offering  him  a  surplus  provided  he 


OTHER  THEORIES  OF  INTEREST  175 

enjoys  the  thing  invested  in  long  enough,  offers  him  no 
surplus  if  he  enjoys  the  thing  no  longer  than  he  thinks  he  is 
likely  to.  At  that  point  Crusoe  may  quite  rationally  restrict 
himself  to  continuing  the  advances  to  nature  that  he  has 
made  previously,  without  making  any  new  ones.  Sup- 
pose also  that  the  time  has  come  when  our  wage  worker 
finds  all  opportunities  eliminated  for  making  advances 
that  can  safely  be  counted  on  to  yield  him  over  4  %  of 
nominal  surplus  or  interest.  Then  perhaps  he  will  con- 
sider, just  as  Crusoe  did,  that  to  make  the  best  invest- 
ment still  open  to  him,  that  is,  say,  to  buy  a  hundred 
dollar  bond  yielding  4  %,  will  mean  no  surplus  to  him. 
And  at  that  point,  like  Crusoe,  he  may  cease  making  new 
advances  and  rest  satisfied  with  keeping  invested  what  he 
has  invested  already. 

There  is  absolutely  no  essential  difference  between  the 
two  cases.  The  only  difference  is  that  the  principal  — 
that  is,  the  unit  above  which  all  is  to  be  counted  as  sur- 
plus —  and  the  surplus  itself  are  defined,  in  Crusoe's 
case,  in  terms  of  his  own  pain  and  pleasure  only,  whereas 
in  the  case  of  the  wage  worker,  who  is  the  capitalist  of 
our  example,  they  are  defined  in  terms  of  the  pain  and 
pleasure  of  those  persons  whose  acts,  in  the  market  of 
the  changing  society  of  the  passing  time,  determine 
nominal  values.  The  surplus  arises  just  the  same  with 
Crusoe  as  with  the  capitalist  in  society ;  its  rate  is  de- 
termined in  his  case  by  essentially  the  same  motives, 
which  may  be  wholly  rational,  as  I  have  supposed  in  the 
comparison ;  and  it  is  really  interest  as  well  in  the  one 
case  as  in  the  other.  Interest,  therefore,  is  independent  of 
the  wage  system  to  which  Marx  supposed  it  to  be  due  entirely. 


176  A  THEORY   OF  INTEREST 

"THE  FALLACY  OF  SAVING" 

§  92.  Among  persons  of  Socialistic  leanings  one  finds 
a  few  whose  chief  tenet  in  respect  to  the  interest  question 
is  that  it  is  pernicious  to  advise  people  generally  to  save 
because  saving  is  not  socially  beneficial  and  would  soon 
cease  to  be  beneficial  to  the  savers  themselves  if  it  were 
practised  by  all.  This  view  is  fully  set  forth  by  an  acute 
writer,  Mr.  J.  M.  Robertson,  M.P.,  in  a  book  called  The 
Fallacy  of  Saving.1  According  to  that  book,  if  the  aggre- 
gate of  saving  were  greater  than  it  is  now,  the  aggregate 
of  consumption  would  necessarily  be  less ;  and  if  con- 
sumption were  less,  production  would  have  to  be  less  if 
it  were  not  to  glut  the  market.  If  all  this  were  true, 
Mr.  Robertson  would  be  quite  right,  in  my  opinion,  in 
pleading  for  "the  substitution  of  an  ideal  of  consump- 
tion for  an  ideal  of  parsimony."  But  is  the  first  condi- 
tion true?  Why  should  more  saving  necessarily  mean 
less  consumption?  There  is  no  reason  whatever.  On 
the  contrary,  the  requisite  of  an  increase  of  consumption 
that  is  not  to  require  also  additional  pain  in  production 
is  an  increase  of  saving.  The  advancing,  at  the  present 
time,  of  services  to  the  value  of  over  $100,000,000  by 
embodying  them  in  improved  channels  in  the  Mississippi 
River  and  some  of  its  tributaries  would  result,  in  the 
opinion  of  eminent  engineers,  in  the  receipt  of  a  nominal 
surplus  by  somebody  in  the  long  run.  But  advancing, 
as  defined  in  this  book,  does  not  differ  a  whit  from  sav- 
ing: either,  at  bottom,  is  simply  exchanging  present 

1  London,  1892. 

2  Fallacy  of  Saving,  p.  90. 


OTHER  THEORIES   OF  INTEREST 


177 


income  for  future  income,  present  services  for  future 
services.  And  clearly  the  nominal  surplus  securable 
by  exchanging,  in  the  way  mentioned,  a  present  income 
to  the  value  of  $100,000,000  for  a  future  income  to  a 
still  greater  nominal  value  makes  possible  a  greater  con- 
sumption by  society  without  greater  cost. 

Is  there  any  reason  why  this  greater  consumption 
without  greater  cost  should  cause  any  glut  in  the  market  ? 
None  whatever ;  it  is  only  when  they  are  restricted  by 
the  barrier  of  cost  that  people  do  not  take  and  consume 
services  offered  to  them  in  the  market.  Furthermore  — 
and  the  point  of  this  remark  will  be  clear  to  those  who 
have  read  Mr.  Robertson's  book  —  the  greater  consump- 
tion without  greater  cost  that  is  made  possible  by  saving 
may  take  the  form  of  better  quality,  better  books,  better 
furniture,  better  music,  etc.  —  just  as  well  as  that  of 
greater  quantity.  Which  of  the  two  forms  the  greater 
consumption  takes  depends  simply  on  the  demand, 
which  is  determined  by  the  taste,  of  the  public  who  con- 
stitute the  market. 

In  any  community  in  which  investment  in  future- 
service  goods  —  houses,  ships,  tools,  or  what  not  — 
yields  a  nominal  surplus  or  interest  —  and  doubtless 
every  community  in  the  world  answers  to  this  description 
-  there  is  no  fallacy  at  all  involved  in  advising  people 
generally  to  save  up  to  the  point  where  they  themselves 
are  unlikely,  in  their  estimation,  to  be  benefited  by 
further  saving.  Normally  the  savings  in  such  a  com- 
munity take  the  form  of  advances  to  nature  that  yield 
the  nominal  surplus  that  commonly  goes  by  the  name  of 
interest.  The  nominal  surplus  thus  yielded  is,  from  the 


iy8  A  THEORY  OF  INTEREST 

point  of  view  of  the  changing  society  of  the  community, 
all  net  gain ;  and  from  the  point  of  view  of  the  individual 
savers  it  is  partly  net  gain  except  in  the  case  of  the  very 
marginal  unit  of  it. 

"FRUCTIFICATION  " 

§  93.  "Fructification"  is  the  name  given  by  Pro- 
fessor Bohm-Bawerk  to  the  interest  theories  of  Turgot 
and  Henry  George. 

Turgot' s  theory  is  expressed  in  these  passages  from  his 
Reflections  sur  la  Formation  et  la  Distribution  des  Richesses 
(first  printed  in  1770)  as  translated  by  Professor  W.  J. 
Ashley.1  Some  passages  of  special  significance  to  us 
I  have  indicated  by  capitals. 

"Whoever,  either  from  the  revenue  of  his  land,  or 
from  the  wages  of  his  labour  or  of  his  industry,  receives 
each  year  more  values  than  he  needs  to  spend,  may  place 
this  superfluity  in  reserve  and  accumulate  it :  these 
accumulated  values  are  what  is  called  a  capital.  The 
timid  Miser,  who  amasses  money  only  to  quiet  his  im- 
agination against  the  apprehension  of  needing  the  neces- 
saries of  life  in  an  uncertain  future,  keeps  his  money 
in  a  hoard.  If  the  dangers  he  foresaw  should  be  realized 
and  if  he  should  be  reduced  by  poverty  to  live  each  year 
upon  his  treasure,  or  if  it  should  happen  that  a  prodigal 
Heir  should  spend  it  by  degrees,  this  treasure  would  soon 
be  exhausted  and  the  capital  entirely  lost  to  the  Possessor: 
the  latter  can  do  much  better  with  it.  SINCE  AN  ES- 
TATE OF  LAND  OF  A  CERTAIN  REVENUE  IS 

1  New  York,  Macmillan,  1898.  The  three  quotations  are  from 
PP-  So-S i,  52-54,  and  67-69  respectively. 


OTHER   THEORIES  OF  INTEREST  179 

BUT  THE  EQUIVALENT  OF  A  SUM  OF  VALUE 
EQUAL  TO  THIS  REVENUE  MULTIPLIED  A 
CERTAIN  NUMBER  OF  TIMES,  IT  FOLLOWS 
THAT  ANY  SUM  WHATEVER  OF  VALUES  IS  THE 
EQUIVALENT  OF  AN  ESTATE  OF  LAND  PRO- 
DUCING A  REVENUE  EQUAL  TO  A  DEFINITE 
FRACTION  OF  THAT  SUM :  it  is  absolutely  indiffer- 
ent whether  this  sum  of  values  or  this  capital  consists 
in  a  mass  of  metal  or  anything  else,  since  the  money 
represents  every  kind  of  value,  just  as  every  kind  of 
value  represents  money.  The  Possessor  of  a  capital  can 
then,  in  the  first  place,  employ  it  in  the  purchase  of 
lands ;  but  he  has  also  other  resources. 

"In  the  earliest  times  he  who  set  men  to  work  fur- 
nished the  materials  himself  and  paid  from  day  to  day 
the  wages  of  the  Workman.  It  was  the  Cultivator 
or  the  Proprietor  himself  that  gave  to  the  Spinner  the 
hemp  he  had  gathered,  and  maintained  her  during  the 
time  of  her  working ;  then  he  handed  over  the  yarn  to 
a  Weaver,  to  whom  he  gave  every  day  the  wages  agreed 
upon ;  but  these  slight  daily  advances  could  be  sufficient 
only  for  works  of  the  simplest  and  roughest  kind.  A 
great  number  of  Crafts,  and  even  of  the  Crafts  engaged 
in  by  the  poorest  Members  of  the  Society,  require  that 
the  same  material  should  pass  through  a  crowd  of  differ- 
ent hands,  and  undergo  for  a  very  long  time  exceedingly 
difficult  and  various  operations.  I  have  already  men- 
tioned the  preparation  of  the  leather  whereof  shoes  are 
made :  whoever  has  seen  the  establishment  of  a  Tanner 
realizes  the  absolute  impossibility  of  one  poor  man,  or 
even  of  several  poor  men,  providing  themselves  with 


l8o  A   THEORY  OF  INTEREST 

hides,  lime,  tan,  utensils,  etc.,  getting  the  buildings 
erected  which  are  necessary  for  setting  a  Tan-house  in 
operation,  and  living  during  several  months  until  the 
leather  is  sold.  In  this  Craft,  and  in  many  others,  must 
not  those  who  work  at  it  have  learned  the  trade  before 
they  venture  to  touch  the  materials,  which  they  would 
spoil  in  their  first  attempts?  Here,  then,  is  another 
advance  indispensable.  Who,  in  the  next  place,  will 
collect  the  materials  for  the  work,  the  ingredients  and 
the  tools  necessary  for  the  process?  Who  will  get 
canals,  market  halls,  all  the  different  kinds  of  buildings 
constructed?  Who  will  enable  that  great  number  of 
Workmen  to  live  until  the  leather  is  sold,  of  whom  none 
could  prepare  a  single  skin  by  himself?  Considering, 
moreover,  that  the  profit  on  the  sale  of  a  single  tanned 
hide  could  not  furnish  subsistence  for  any  one  of  them. 
Who  will  defray  the  expenses  for  the  instruction  of  Pupils 
and  Apprentices  ?  Who  will  procure  for  them  the  means 
of  subsistence  until  they  are  taught,  by  enabling  them  to 
pass  step  by  step  from  labour  which  is  easy  and  propor- 
tioned to  their  age  to  labours  which  demand  the  utmost 
vigour  and  ability  ?  It  will  be  one  of  those  Possessors 
of  capitals,  or  of  movable  accumulated  values,  who  will 
employ  them,  partly  in  advances  for  the  construction  of 
the  establishment  and  for  the  purchase  of  materials, 
partly  for  the  daily  wages  of  the  Workmen  who  labour 
in  the  preparation  (of  the  commodities).  IT  IS  HE 
WHO  WILL  WAIT  FOR  THE  SALE  OF  THE 
LEATHER  TO  RETURN  TO  HIM  NOT  ONLY 
ALL  HIS  ADVANCES  BUT  A  PROFIT  IN  ADDI- 
TION, SUFFICIENT  TO  MAKE  UP  TO  HIM  FOR 


OTHER  THEORIES  OF  INTEREST  181 

WHAT  HIS  MONEY  WOULD  HAVE  BEEN 
WORTH  TO  HIM  IF  HE  HAD  EMPLOYED  IT 
IN  THE  PURCHASE  OF  AN  ESTATE;  and,  fur- 
thermore, for  the  wages  due  to  his  labours,  his  cares,  his 
risks,  and  even  his  skill ;  for  doubtless,  if  the  profit  were 
the  same,  he  would  have  preferred  to  live  without  exer- 
tion on  the  revenue  of  the  land  he  could  have  acquired 
with  the  same  capital.  As  fast  as  this  capital  comes 
back  to  him  by  the  sale  of  the  products,  he  uses  it  for 
new  purchases  in  order  to  supply  and  maintain  his  Man- 
ufactory by  this  continual  circulation :  on  his  profits  he 
lives,  and  he  places  on  one  side  what  he  can  spare  to  in- 
crease his  capital  and  put  into  his  business,  adding  to 
the  amount  of  his  advances  in  order  to  add  still  more  to 
his  profits. 

"The  price  of  the  loan  is  by  no  means  founded,  as  might 
be  imagined,  on  the  profit  the  borrower  hopes  to  make 
with  the  capital  of  which  he  purchases  the  use.  This 
price  is  determined,  like  the  price  of  all  merchandise, 
by  the  chaffering  of  seller  and  buyer,  by  the  balance  of 
the  offer  with  the  demand.  People  borrow  with  every 
kind  of  purpose  and  with  every  sort  of  motive.  This 
one  borrows  to  undertake  an  enterprise  which  will  make 
his  fortune,  this  other  to  purchase  an  estate  :  another  to 
pay  a  gaming  debt ;  another  to  make  up  for  the  loss  of 
his  revenue  of  which  some  accident  has  deprived  him ; 
and  another  to  keep  himself  alive  until  he  can  get  some- 
thing by  his  labour;  but  all  these  motives  which  in- 
fluence the  borrower  are  quite  indifferent  to  the  lender. 
He  cares  about  two  things  only,  the  interest  he  is  to  re- 
ceive, and  the  safety  of  his  capital.  He  does  not  trouble 


182  A  THEORY  OF  INTEREST 

himself  about  the  use  the  borrower  will  make  of  it,  any 
more  than  a  Merchant  concerns  himself  with  the  use  a 
purchaser  will  make  of  the  commodities  he  sells  him. 

"It  is  for  want  of  having  looked  at  lending  on  interest 
in  its  true  light  that  certain  moralists,  more  rigid  than 
enlightened,  have  endeavoured  to  make  us  regard  it  as 
a  crime.  The  Scholastic  theologians  have  concluded 
from  the  fact  that  money  produces  nothing  by  itself  that 
it  was  unjust  to  demand  interest  for  money  placed  on 
loan.  Full  of  their  prejudices,  they  have  believed  their 
doctrine  was  sanctioned  by  this  passage  of  the  Gospel : 
Mutuum  date,  nihil  inde  sperantes.  Those  theologians 
who  have  adopted  more  reasonable  principles  on  the 
subject  of  interest  have  had  to  endure  the  harshest  re- 
proaches from  writers  of  the  opposite  party. 

"Nevertheless  it  needs  but  little  reflection  to  realize 
the  frivolity  of  the  pretexts  which  have  been  made  use 
of  to  condemn  the  taking  of  interest.  A  loan  is  a  recipro- 
cal contract,  free  between  the  two  parties,  which  they 
make  only  because  it  is  advantageous  to  them.  It  is 
evident  that,  if  the  Lender  finds  it  to  his  advantage  to 
receive  something  as  the  hire  of  his  money,  the  Borrower 
is  equally  interested  in  finding  the  money  of  which  he 
stands  in  need ;  as  is  shown  by  his  making  up  his  mind 
to  borrow  and  to  pay  the  hire  of  the  money:  but  on 
what  principle  can  one  imagine  a  crime  in  a  contract 
which  is  advantageous  to  the  two  parties,  with  which 
both  are  content  and  which  certainly  does  not  injure 
anyone  else.  To  say  that  the  Lender  takes  advantage  of 
the  Borrower's  need  of  money  to  demand  interest  for 
it  is  to  talk  as  absurdly  as  if  one  should  say  that  a  Baker 


OTHER  THEORIES  OF  INTEREST  183 

who  demands  money  for  the  bread  he  sells  takes  advan- 
tage of  the  Purchaser's  need  of  bread.  If,  in  the  latter 
case,  the  money  is  the  equivalent  of  the  bread  the  Pur- 
chaser receives,  the  money  which  the  Borrower  receives 
to-day  is  equally  the  equivalent  of  the  capital  and  of  the 
interest  which  he  promises  to  return  at  the  expiration 
of  a  certain  time ;  for,  in  short,  it  is  an  advantage  for  the 
Borrower  to  have  during  this  interval  the  money  he 
stands  in  need  of,  and  it  is  a  disadvantage  to  the  Lender 
to  be  deprived  of  it.  This  disadvantage  is  capable  of 
being  estimated,  and  it  is  estimated ;  the  interest  is  the 
price  of  it.  This  price  ought  to  be  higher  if  the  Lender 
runs  a  risk  of  losing  his  capital  by  the  insolvency  of  the 
Borrower.  The  bargain,  therefore,  is  perfectly  equal  on 
both  sides,  and  consequently  fair.  Money  considered  as 
a  physical  substance,  as  a  mass  of  metal,  does  not  pro- 
duce anything;  but  money  employed  in  advances  for 
enterprises  in  Agriculture,  Manufacture,  and  Com- 
merce procures  a  definite  profit.  WITH  MONEY 
ONE  CAN  PURCHASE  AN  ESTATE,  AND 
THEREBY  PROCURE  A  REVENUE.  THE  PER- 
SON, THEREFORE,  WHO  LENDS  HIS  MONEY 
DOES  NOT  MERELY  GIVE  UP  THE  BARREN 
POSSESSION  OF  THAT  MONEY;  HE  DEPRIVES 
HIMSELF  OF  THE  PROFIT  OR  OF  THE  REV- 
ENUE WHICH  HE  WOULD  HAVE  BEEN  ABLE 
TO  PROCURE  BY  IT ;  and  the  interest  which  in- 
demnifies him  for  this  privation  cannot  be  regarded  as 
unjust." 

"The  position  of  the  Husbandman  is  very  different 
[from  that  of  landless  workmen].     The  land  pays  him 


1 84  A  THEORY   OF  INTEREST 

directly  the  price  of  his  labour,  independently  of  any 
other  man  or  any  agreement.  Nature  does  not  bargain 
with  him  to  oblige  him  to  content  himself  with  what  is 
absolutely  necessary.  What  she  grants  is  proportioned 
neither  to  his  wants,  nor  to  a  contractual  valuation  of  the 
price  of  his  days  of  labour.  It  is  the  physical  result  of 
the  fertility  of  the  soil,  and  of  the  wisdom,  far  more  than 
of  the  laboriousness,  of  the  means  which  he  has  employed 
to  render  it  fertile.  As  soon  as  the  labour  of  the  Hus- 
bandman produces  more  than  his  wants,  he  can,  with 
this  superfluity  that  nature  accords  him  as  a  pure  gift, 
over  and  above  the  wages  of  his  toil,  buy  the  labour  of 
the  other  members  of  the  society.  The  latter,  in  selling 
to  him,  gain  only  their  livelihood ;  but  the  Husbandman 
gathers,  beyond  his  subsistence,  a  wealth  which  is  inde- 
pendent and  disposable,  which  he  has  not  bought  and 
which  he  sells." 

"By  this  new  arrangement  [division  of  the  land  be- 
tween working  farmers  and  non-working  proprietors] 
the  produce  of  the  land  is  divided  into  two  parts.  The 
one  includes  the  subsistence  and  the  profits  of  the  Hus- 
bandman, which  are  the  reward  of  his  labour  and  the  con- 
dition upon  which  he  undertakes  to  cultivate  the  field  of 
the  Proprietor.  What  remains  is  that  independent  and 
disposable  part  which  the  land  gives  as  a  pure  gift  to 
him  who  cultivates  it,  over  and  above  his  advances  and 
the  wages  of  his  trouble ;  and  this  is  the  portion  of  the 
Proprietor,  or  the  revenue  with  which  the  latter  can  live 
without  labour  and  which  he  carries  where  he  will." 

From  these  passages  it  is  clear  that  Turgot  regards 
interest  on  loans  as  a  mere  reflection  of  the  net  revenue 


OTHER   THEORIES  OF  INTEREST  185 

which  an  investment  of  the  same  amount  in  land  might 
bring  the  investor,  and  that  he  regards  the  net  revenue 
which  the  investment  in  land  would  yield  as  caused  by 
the  spontaneous  fertility  of  the  soil. 

This  theory  of  interest  is  just  as  good  as  that  which 
explains  interest  as  due  simply  to  the  "productivity" 
or  usefulness  of  tools  or  machines  —  and  no  better. 
Both  theories  are  plausible  enough  until  the  fatal  question 
is  asked,  Why  can  the  land,  or  the  machine,  be  bought 
at  a  price  lower  than  the  sum  of  the  prices  of  all  its 
future  services  ?  But  when  that  question  is  asked,  both 
theories  fail  utterly. 

§  94.  More  than  a  hundred  years  after  the  publica- 
tion of  Turgot's  theory,  a  similar  one  was  advanced  by 
Henry  George  in  his  Progress  and  Poverty.1  The  net 
revenue  or  surplus  of  which  interest  is  a  reflection  is  due, 
in  George's  thought,  to  "the  active  power  of  nature,  the 
principle  of  growth,  of  reproduction,  which  everywhere 
characterizes  all  the  forms  of  that  mysterious  thing  or 
condition  which  we  call  life."  The  following  passage 
from  Progress  and  Poverty 2  expresses  George's  theory, 
which  is  clearly  summed  up  in  a  few  lines,  near  the  end, 
which  I  have  printed  in  capitals. 

"Why  should  interest  be?  Interest,  we  are  told,  in 
all  the  standard  works,  is  the  reward  of  abstinence.  But, 
manifestly,  this  does  not  sufficiently  account  for  it. 
Abstinence  is  not  an  active,  but  a  passive  quality ;  it  is 
not  a  doing  —  it  is  simply  a  not  doing.  Abstinence  in 
itself  produces  nothing.  Why,  then,  should  any  part  of 

1  Written  in  1877-1879,  published  in  1879. 

2  Edition  of  Doubleday,  Page  and  Co.,  N.Y.,  1906,  pp.  175-182. 


1 86  A  THEORY  OF  INTEREST 

what  is  produced  be  claimed  for  it  ?  If  I  have  a  sum  of 
money  which  I  lock  up  for  a  year,  I  have  exercised  as 
much  abstinence  as  though  I  had  loaned  it.  Yet,  though 
in  the  latter  case  I  will  expect  it  to  be  returned  to  me 
with  an  additional  sum  by  way  of  interest,  in  the  former 
I  will  have  but  the  same  sum,  and  no  increase.  But  the 
abstinence  is  the  same.  If  it  be  said  that  in  lending  it  I 
do  the  borrower  a  service,  it  may  be  replied  that  he  also 
does  me  a  service  in  keeping  it  safely  —  a  service  that 
under  some  conditions  may  be  very  valuable,  and  for 
which  I  would  willingly  pay,  rather  than  not  have  it ;  and 
a  service  which,  as  to  some  forms  of  capital,  may  be  even 
more  obvious  than  as  to  money.  For  there  are  many 
forms  of  capital  which  will  not  keep,  but  must  be  con- 
stantly renewed ;  and  many  which  are  onerous  to  main- 
tain if  one  has  no  immediate  use  for  them.  So,  if  the 
accumulator  of  capital  helps  the  user  of  capital  by  loan- 
ing it  to  him,  does  not  the  user  discharge  the  debt  in  full 
when  he  hands  it  back  ?  Is  not  the  secure  preservation, 
the  maintenance,  the  re-creation  of  capital,  a  complete 
offset  to  the  use  ?  Accumulation  is  the  end  and  aim  of 
abstinence.  Abstinence  can  go  no  further  and  accom- 
plish no  more ;  nor  of  itself  can  it  even  do  this.  If  we 
were  merely  to  abstain  from  using  it,  how  much  wealth 
would  disappear  in  a  year  !  And  how  little  would  be  left 
at  the  end  of  two  years  !  Hence,  if  more  is  demanded 
for  abstinence  than  the  safe  return  of  capital,  is  not 
labor  wronged  ?  Such  ideas  as  these  underlie  the  wide- 
spread opinion  that  interest  can  accrue  only  at  the  ex- 
pense of  labor,  and  is  in  fact  a  robbery  of  labor  which  in 
a  social  condition  based  on  justice  would  be  abolished. 


OTHER   THEORIES  OF  INTEREST  187 

"The  attempts  to  refute  these  views  do  not  appear  to 
me  always  successful.  For  instance,  as  it  illustrates  the 
usual  reasoning,  take  Bastiat's  oft-quoted  illustration  of 
the  plane.  One  carpenter,  James,  at  the  expense  of  ten 
days'  labor,  makes  himself  a  plane,  which  will  last  in 
use  for  290  of  the  300  working  days  of  the  year.  William, 
another  carpenter,  proposes  to  borrow  the  plane  for  a 
year,  offering  to  give  back  at  the  end  of  that  time,  when 
the  plane  will  be  worn  out,  a  new  plane  equally  as  good. 
James  objects  to  lending  the  plane  on  these  terms, 
urging  that  if  he  merely  gets  back  a  plane,  he  will  have 
nothing  to  compensate  him  for  the  loss  of  the  advantage 
which  the  use  of  the  plane  during  the  year  would  give 
him.  William,  admitting  this,  agrees  not  merely  to 
return  a  plane,  but,  in  addition,  to  give  James  a  new 
plank.  The  agreement  is  carried  out  to  mutual  satis- 
faction. The  plane  is  used  up  during  the  year,  but  at 
the  end  of  the  year  James  receives  as  good  a  one,  and  a 
plank  in  addition.  He  lends  the  new  plane  again  and 
again,  until  finally  it  passes  into  the  hands  of  his  son, 
'who  still  continues  to  lend  it,'  receiving  a  plank  each 
time.  This  plank,  which  represents  interest,  is  said  to 
be  a  natural  and  equitable  remuneration,  as  by  giving 
it  in  return  for  the  use  of  the  plane,  William  'obtains 
the  power  which  exists  in  the  tool  to  increase  the  pro- 
ductiveness of  labor,'  and  is  no  worse  off  than  he  would 
have  been  had  he  not  borrowed  the  plane ;  while  James 
obtains  no  more  than  he  would  have  had  if  he  had  re- 
tained and  used  the  plane  instead  of  lending  it. 

"Is  this  really  so ?  It  will  be  observed  that  it  is  not 
affirmed  that  James  could  make  the  plane  and  William 


1 88  A  THEORY  OF  INTEREST 

could  not,  for  that  would  be  to  make  the  plank  the 
reward  of  superior  skill.  It  is  only  that  James  had 
abstained  from  consuming  the  result  of  his  labor  until 
he  had  accumulated  it  in  the  form  of  a  plane  —  which  is 
the  essential  idea  of  capital. 

"Now,  if  James  had  not  lent  the  plane,  he  could  have 
used  it  for  290  days,  when  it  would  have  been  worn  out, 
and  he  would  have  been  obliged  to  take  the  remaining 
ten  days  of  the  working  year  to  make  a  new  plane.  If 
William  had  not  borrowed  the  plane,  he  would  have 
taken  ten  days  to  make  himself  a  plane,  which  he  could 
have  used  for  the  remaining  290  days.  Thus,  if  we  take 
a  plank  to  represent  the  fruits  of  a  day's  labor  with  the 
aid  of  a  plane,  at  the  end  of  the  year,  had  no  borrowing 
taken  place,  each  would  have  stood  with  reference  to 
the  plane  as  he  commenced,  James  with  a  plane,  and 
William  with  none,  and  each  would  have  had  as  the 
result  of  the  year's  work  290  planks.  If  the  condition 
of  the  borrowing  had  been  what  William  first  proposed, 
the  return  of  a  new  plane,  the  same  relative  situation 
would  have  been  secured.  William  would  have  worked 
for  290  days,  and  taken  the  last  ten  days  to  make  the 
new  plane  to  return  to  James.  James  would  have  taken 
the  first  ten  days  of  the  year  to  make  another  plane 
which  would  have  lasted  for  290  days,  when  he  would 
have  received  a  new  plane  from  William.  Thus,  the 
simple  return  of  the  plane  would  have  put  each  in  the 
same  position  at  the  end  of  the  year  as  if  no  borrowing 
had  taken  place.  James  would  have  lost  nothing  to  the 
gain  of  William,  and  William  would  have  gained  noth- 
ing to  the  loss  of  James.  Each  would  have  had  the  re- 


OTHER  THEORIES  OF  INTEREST  189 

turn  his  labor  would  otherwise  have  yielded  —  viz.,  290 
planks,  and  James  would  have  had  the  advantage  with 
which  he  started,  a  new  plane. 

"But  when,  in  addition  to  the  return  of  a  plane,  a 
plank  is  given,  James  at  the  end  of  the  year  will  be  in  a 
better  position  than  if  there  had  been  no  borrowing,  and 
William  in  a  worse.  James  will  have  291  planks  and  a 
new  plane,  and  William  289  planks  and  no  plane.  If 
William  now  borrows  the  plank  as  well  as  the  plane  on 
the  same  terms  as  before,  he  will  at  the  end  of  the  year 
have  to  return  to  James  a  plane,  two  planks  and  a  frac- 
tion of  a  plank  ;  and  if  this  difference  be  again  borrowed, 
and  so  on,  is  it  not  evident  that  the  income  of  the  one 
will  progressively  decline,  and  that  of  the  other  will 
progressively  increase,  until  at  length,  if  the  operation 
be  continued,  the  time  will  come  when,  as  the  result  of 
the  original  lending  of  a  plane,  James  will  obtain  the 
whole  result  of  William's  labor  —  that  is  to  say,  William 
will  become  virtually  his  slave  ? 

"Is  interest,  then,  natural  and  equitable?  There  is 
nothing  in  this  illustration  to  show  it  to  be.  Evidently 
what  Bastiat  (and  many  others)  assigns  as  the  basis  of 
interest,  'the  power  which  exists  in  the  tool  to  increase 
the  productiveness  of  labor,'  is  neither  in  justice  nor  in 
fact  the  basis  of  interest.  The  fallacy  which  makes 
Bastiat's  illustration  pass  as  conclusive  with  those  who 
do  not  stop  to  analyze  it,  as  we  have  done,  is  that  with 
the  loan  of  the  plane  they  associate  the  transfer  of  the 
increased  productive  power  which  a  plane  gives  to  labor. 
But  this  is  really  not  involved.  The  essential  thing 
which  James  loaned  to  William  was  not  the  increased 


1 90  A  THEORY  OF  INTEREST 

power  which  labor  acquires  from  using  planes.  To  sup- 
pose this,  we  should  have  to  suppose  that  the  making 
and  using  of  planes  was  a  trade  secret  or  a  patent  right, 
when  the  illustration  would  become  one  of  monopoly, 
not  of  capital.  The  essential  thing  which  James  loaned 
to  William  was  not  the  privilege  of  applying  his  labor  in 
a  more  effective  way,  but  the  use  of  the  concrete  result 
of  ten  days'  labor.  If  'the  power  which  exists  in  tools 
to  increase  the  productiveness  of  labor'  were  the  cause 
of  interest,  then  the  rate  of  interest  would  increase  with 
the  march  of  invention.  This  is  not  so.  Nor  yet  will 
I  be  expected  to  pay  more  interest  if  I  borrow  a  fifty- 
dollar  sewing  machine  than  if  I  borrow  fifty  dollars' 
worth  of  needles ;  if  I  borrow  a  steam  engine  than  if  I 
borrow  a  pile  of  bricks  of  equal  value.  Capital,  like 
wealth,  is  interchangeable.  It  is  not  one  thing ;  it  is 
anything  to  that  value  within  the  circle  of  exchange. 
Nor  yet  does  the  improvement  of  tools  add  to  the  re- 
productive power  of  capital;  it  adds  to  the  productive 
power  of  labor. 

''And  I  am  inclined  to  think  that  if  all  wealth  con- 
sisted of  such  things  as  planes,  and  all  production  was 
such  as  that  of  carpenters  —  that  is  to  say,  if  wealth 
consisted  but  of  the  inert  matter  of  the  universe,  and 
production  of  working  up  this  inert  matter  into  different 
shapes,  that  interest  would  be  but  the  robbery  of  in- 
dustry, and  could  not  long  exist.  This  is  not  to  say 
that  there  would  be  no  accumulation,  for  though  the 
hope  of  increase  is  a  motive  for  turning  wealth  into 
capital,  it  is  not  the  motive,  or,  at  least,  not  the  main 
motive,  for  accumulating.  Children  will  save  their 


OTHER  THEORIES  OF  INTEREST 


IQI 


pennies  for  Christmas ;  pirates  will  add  to  their  buried 
treasure;  Eastern  princes  will  accumulate  hoards  of 
coin ;  and  men  like  Stewart  or  Vanderbilt,  having  become 
once  possessed  of  the  passion  of  accumulating,  would 
continue  as  long  as  they  could  to  add  to  their  millions, 
even  though  accumulation  brought  no  increase.  Nor 
yet  is  it  to  say  that  there  would  be  no  borrowing  or  lend- 
ing, for  this,  to  a  large  extent,  would  be  prompted  by 
mutual  convenience.  If  William  had  a  job  of  work  to 
be  immediately  begun  and  James  one  that  would  not 
commence  until  ten  days  thereafter,  there  might  be  a 
mutual  advantage  in  the  loan  of  the  plane,  though  no 
plank  should  be  given. 

"But  all  wealth  is  not  of  the  nature  of  planes,  or 
planks,  or  money,  which  has  no  reproductive  power ; 
nor  is  all  production  merely  the  turning  into  other  forms 
of  this  inert  matter  of  the  universe.  It  is  true  that  if 
I  put  away  money,  it  will  not  increase.  But  suppose, 
instead,  I  put  away  wine.  At  the  end  of  a  year  I  will 
have  an  increased  value,  for  the  wine  will  have  improved 
in  quality.  Or  supposing  that  in  a  country  adapted  to 
them,  I  set  out  bees ;  at  the  end  of  a  year  I  will  have  more 
swarms  of  bees,  and  the  honey  which  they  have  made. 
Or,  supposing,  where  there  is  a  range,  I  turn  out  sheep, 
or  hogs,  or  cattle ;  at  the  end  of  the  year  I  will,  upon 
the  average,  also  have  an  increase. 

"Now  what  gives  the  increase  in  these  cases  is  some- 
thing which,  though  it  generally  requires  labor  to  utilize 
it,  is  yet  distinct  and  separable  from  labor  —  the  active 
power  of  nature ;  THE  PRINCIPLE  OF  GROWTH, 
OF  REPRODUCTION,  WHICH  EVERYWHERE 


192  A  THEORY  OF  INTEREST 

CHARACTERIZES  ALL  THE  FORMS  OF  THAT 
MYSTERIOUS  THING  OR  CONDITION  WHICH 
WE  CALL  LIFE.  AND  IT  SEEMS  TO  ME  THAT 
IT  IS  THIS  WHICH  IS  THE  CAUSE  OF  INTEREST, 
OR  THE  INCREASE  OF  CAPITAL  OVER  AND 
ABOVE  THAT  DUE  TO  LABOR.  There  are,  so  to 
speak,  in  the  movements  which  make  up  the  everlasting 
flux  of  nature,  certain  vital  currents,  which  will,  if  we 
use  them,  aid  us,  with  a  force  independent  of  our  own 
efforts,  in  turning  matter  into  the  forms  we  desire  — 
that  is  to  say,  into  wealth. 

"While  many  things  might  be  mentioned  which,  like 
money,  or  planes,  or  planks,  or  engines,  or  clothing,  have 
no  innate  power  of  increase,  yet  other  things  are  in- 
cluded in  the  terms  wealth  and  capital  which,  like  wine, 
will  of  themselves  increase  in  quality  up  to  a  certain 
point ;  or,  like  bees  or  cattle,  will  of  themselves  increase 
in  quantity;  and  certain  other  things,  such  as  seeds, 
which,  though  the  conditions  which  enable  them  to  in- 
crease may  not  be  maintained  without  labor,  yet  will, 
when  these  conditions  are  maintained,  yield  an  increase, 
or  give  a  return  over  and  above  that  which  is  to  be 
attributed  to  labor. 

"Now  the  interchangeability  of  wealth  necessarily 
involves  an  average  between  all  the  species  of  wealth  of 
any  special  advantage  which  accrues  from  the  posses- 
sion of  any  particular  species,  for  no  one  would  keep 
capital  in  one  form  when  it  could  be  changed  into  a 
more  advantageous  form.  No  one,  for  instance,  would 
grind  wheat  into  flour  and  keep  it  on  hand  for  the  con- 
venience of  those  who  desire  from  time  to  time  to  ex- 


OTHER  THEORIES  OF  INTEREST  193 

change  wheat  or  its  equivalent  for  flour,  unless  he  could 
by  such  exchange  secure  an  increase  equal  to  that  which, 
all  things  considered,  he  could  secure  by  planting  his 
wheat.  No  one,  if  he  could  keep  them,  would  exchange 
a  flock  of  sheep  now  for  their  net  weight  in  mutton  to 
be  returned  next  year ;  for  by  keeping  the  sheep  he  would 
not  only  have  the  same  amount  of  mutton  next  year, 
but  also  the  lambs  and  the  fleeces.  No  one  would  dig 
an  irrigating  ditch,  unless  those  who  by  its  aid  are  en- 
abled to  utilize  the  reproductive  forces  of  nature  would 
give  him  such  a  portion  of  the  increase  they  receive  as  to 
make  his  capital  yield  him  as  much  as  theirs.  And  so, 
in  any  circle  of  exchange,  the  power  of  increase  which 
the  reproductive  or  vital  force  of  nature  gives  to  some 
species  of  capital  must  average  with  all ;  and  he  who 
lends,  or  uses  in  exchange,  money,  or  planes,  or  bricks, 
or  clothing,  is  not  deprived  of  the  power  to  obtain  an 
increase,  any  more  than  if  he  had  lent  or  put  to  a  repro- 
ductive use  so  much  capital  in  a  form  capable  of  in- 
crease." 

Between  this  theory  and  Turgot's  the  differences  are 
only  superficial.  The  part  played  by  the  natural  fer- 
tility of  the  soil  in  Turgot's  theory  is  taken  in  George's 
by  the  vital  and  reproductive  forces  of  plants  and  ani- 
mals. And  both  these  theories  differ  only  superficially 
from  the  productivity  theory  in  its  simplest  and  crudest 
form,  according  to  which  interest  is  accounted  for  by 
the  utility  of  tools  and  labor-saving  devices. 

The  "  fructification  theory,"  in  the  form  it  takes  with 
George  as  well  as  in  that  it  takes  with  Turgot,  is  revealed 
as  utterly  inadequate  by  the  single  question  that  reveals 


194  A  THEORY  OF  INTEREST 

also  the  inadequacy  of  the  productivity  theory:  Why 
can  a  cow,  why  can  a  young  apple  tree,  why  can  a  plow  or  a 
steam  engine  be  bought  at  a  price  lower  than  the  sum  of  the 
prices  of  all  its  future  services  ?  If  a  cow  or  an  apple 
tree  or  a  plow  could  not  be  bought  at  such  a  price,  no 
interest  would  accrue  to  its  owner  as  its  services  came 
in  with  the  passing  of  time ;  and  that  a  cow  or  an  apple 
tree  or  a  plow  can  be  bought  thus  is  not  accounted  for 
in  the  least  by  the  vital  forces  in  animals  or  plants,  by 
the  fertility  of  the  soil,  or  by  the  usefulness  of  tools. 
The  only  productivity  in  connection  with  animals  or 
plants,  or  with  the  soil,  or  with  tools,  that  is  significant 
in  connection  with  the  interest  problem  is  value-produc- 
tivity, and  the  value-productivity  of  anything  whatever 
is  accounted  for  only  by  the  discounting  of  future  ser- 
vices by  particular  persons  or  groups  of  persons  in  order 
that  the  future  services  received,  principal  and  interest 
together,  shall  equal  in  value  to  those  persons  or  groups 
of  persons  the  present  services  advanced. 

THE  "SACRIFICE  CAPITALISTIQUE " 

§  95.  In  his  L'Interet  du  Capital,1  M.  Adolphe  Landry 
explains,  under  the  name  of  the  "sacrifice  capitalistique," 
a  principle  not  previously  suggested,  so  far  as  I  know, 
by  any  economist,  which  he  regards  as  accounting  in  part 
for  the  checking  of  advancing  at  such  a  point  as  to 
maintain  a  positive  rate  of  interest.  This  principle  is  of 
special  interest  to  me  because  I  had  hit  upon  it  myself 
independently  a  few  months  before  reading  Landry's 

1  Paris,  V.  Giard  &  E.  Briere,  1904. 


OTHER  THEORIES  OF  INTEREST 


195 


book,  and  regarded  it,  at  that  time  and  for  a  while  after 
I  read  Landry,  as  one  of  the  important  keys  to  the  solu- 
tion of  the  interest  problem.  The  principle  is  explained 
by  Landry  briefly  l  as  "le  fait  que  tout  deplacement  dans 
la  consommation  est  prejudiciable,  en  tant  qu'il  rompt 
I'equilibre  de  la  consommation,  qu'il  aggrave  un  defaut 
d'equilibre,  ou  qu'il  remplace  un  defaut  d'equilibre  par  un 
defaut  d'equilibre  inverse  et  plus  marque." 

It  is  explained  more  fully  as  follows,  on  pp.  53-56 
of  the  work  cited.  A  translation  follows. 

"Nous  arrivons  maintenant  a  un  cas  nouveau,  dont 
I'importance  pratique  est  tres  grande :  le  cas  ou  les 
besoins  comme  les  ressources  demeurent  les  memes  a 
travers  le  temps.  Dans  ce  cas  encore  la  capitalisation 
ne  pourra  avoir  lieu  que  si  elle  doit  donner  un  rendement. 

"Je  suppose  que  mes  ressources  soient  de  15,000 
francs  pour  cette  annee  et  de  15,000  francs  encore  pour 
1'annee  prochaine,  et  que  pour  une  consommation  de 
15,000  francs  les  derniers  100  francs  depenses  doivent 
me  procurer,  cette  annee-ci,  comme  1'annee  prochaine, 
une  utilite  que  j'estime  a  M.  II  s'agit  pour  moi  d'avancer 
1000  francs  pendant  un  an?  Je  me  verrais  contraint 
de  reduire  mon  bien-etre,  cette  annee-ci,  de 
M  +  M'  -f-  M"  +  •  •  •  ,  et  je  me  mettrais  a 
meme  d'accroitre  mon  bien-etre,  1'an  prochain,  de 
MI  -f-  M2  -f-  M3  -j-  .  .  .  .  Or  la  loi  de  la  decroissance 
de  1'utilite  qui  veut  que  1'utilite  d'une  certaine  quantite 
d*un  bien  soit  d'autant  plus  faible  qu'on  possede  deja 
une  plus  grande  quantite  du  bien  en  question,  cette  loi, 
par  cela  meme  qu'elle  s' applique  a  tons  les  autres  bicns, 
1  Work  cited,  p.  145. 


1 96  A  THEORY  OF  INTEREST 

s'applique  a  ce  bien  d'une  nature  tres  particuliere  qu'est 
1'argent.  Employant  au  mieux  notre  argent,  nous  nous 
procurons  avec  des  sommes  successives  egales  des  satis- 
factions toujours  plus  faibles.  •  On  a  done 

.  .  .  M"  >  M'>M  >  Mi  >  Mi  >  Mi  .  .  .  , 

et  par  suite 

M  +  M'  +  M"  +  .  .  .  >  M!  +  M2  +  M3  +  .  .  . 

L'avance  dont  je  parlais  ne  deviendra  possible  que  si 
elle  doit  dormer  un  rendement  au  moins  egal  a  la  dif- 
ference 

(M  +  M'  +  M"  +  .  .  .)  -  (Mi  +  M2  +  M3  +  .  .  .)• 

"S'il  s'agissait  d'avancer  2000  francs  au  lieu  de  1000 
francs,  le  rendement  exige  serait  plus  que  double ;  car  a 
la  serie  M  +  M'  +  M"  +  .  .  .  viendraient  s'ajouter 
dix  termes  tous  plus  grands  que  les  dix  premiers,  et  a 
la  serie  Mi  +  M2  +  M3  +  .  .  .  viendraient  s'ajouter 
de  meme  dix  termes  plus  petits  que  les  dix  premiers. 
La  somme  a  capitaliser  augmentant,  le  rendement  exige 
subirait  une  augmentation,  non  pas  proportionnelle, 
mais  plus  rapide.  Ainsi  la  decroissance  de  1'utilite  agit 
comme  une  sorte  de  frein  qui  arrete  la  capitalisation,  et 
elle  agit  d'une  maniere  toujours  plus  puissante  pour  une 
capitalisation  plus  forte. 

"On  voit  le  lien  etroit  qui  rattache  ensemble  toutes 
les  considerations  qui  viennent  d'etre  developpees. 
Toutes  decoulent  d'un  meme  principe,  a  savoir  que  la 
meilleure  facon  de  distribuer  sa  consommation  dans  le 
temps  est  celle  qui  fait  que  les  derniers  besoins  satisfaits 
ont  la  meme  importance  a  chaque  moment  du  temps. 


OTHER  THEORIES  OF  INTEREST  197 

De  ce  principe,  que  j'appellerai  le  principe  de  1'equilibre 
de  la  consommation,  les  consequences  suivantes  se 
deduisent : 

"  i°.  la  capitalisation  ne  coute  rien  au  capitaliste  quand 
elle  tend  a  etablir  1'equilibre  de  la  consommation ; 

"  2°.  la  capitalisation  coute  au  capitaliste — et  celui-ci, 
par  suite,  ne  s'y  decidera  que  moyennant  1'assurance  de 
percevoir  un  surplus  —  lorsqu'elle  detruit  1'equilibre  de 
la  consommation,  ou  qu'elle  aggrave  le  defaut  d'equilibre 
de  cette  consommation. 

aOr,  la  capitalisation  tend  a  etablir  1'equilibre  de  la 
consommation : 

"  (a)  quand  les  besoins  doivent  croitre ; 

"  (b)  quand  les  ressources  doivent  diminuer. 

"La  capitalisation,  d'autre  part,  detruit  1'equilibre  de  la 
consommation,  ou  aggrave  le  defaut  d'equilibre : 

"  (a)  quand  les  besoins  doivent  diminuer ; 

"  (b)  quand  les  ressources  doivent  croitre ; 

"  (c)  quand  les  besoins  et  les  ressources  doivent  rester 
les  memes. 

"Si  nous  nous  attachons  uniquement  aux  facteurs  qui 
s'opposent  a  la  capitalisation,  nous  pourrons  dire  que  ces 
facteurs  se  reduisent  a  un,  puisque  c'est  toujours  la  loi 
de  la  decroissance  de  1'utilite  qui,  dans  les  cas  enumeres 
ci-dessus,  fait  la  'rarete  du  capital,'  empeche  que  les 
capitaux  soient  avances  a  moins  de  1'assurance  d'une 
plus-value.  En  un  certain  sens,  cependant,  nous  sommes 
en  droit  de  dire  que  nous  avons  trois  causes :  tantot,  en 
effet,  c'est  parce  qu'une  diminution  des  besoins  empeche 
1'equilibre  de  la  consommation  que  la  capitalisation, 
aggravant  ce  defaut  d'equilibre,  est  en  elle-meme  fa- 


198  A  THEORY  OF  INTEREST 

cheuse;  tantot  c'est  parce  qu'il  y  a  accroissement  des 
ressources  que  la  capitalisation  est  encore  facheuse,  et 
de  la  meme  maniere ;  tantot  enfin,  au  lieu  d'aggraver, 
la  capitalisation  cree  le  defaut  d'equilibre  de  la  consom- 
mation.  Pour  la  commodite  de  1'exposition,  je  dirai 
desormais,  parlant  de  ces  trois  causes :  la  diminution 
des  besoins,  I'accroissement  des  ressources  et  le  sacrifice 
capitalistique." 

Translation  of  the  passage  quoted  from  pp.  53-56  of 
Landry's  L'Interet  du  Capital:  — 

"We  come  now  to  a  new  case,  the  practical  impor- 
tance of  which  is  very  great,  the  case  in  which  wants  as 
well  as  resources  remain  the  same  throughout  the  time. 
In  this  case  also  capitalization  1  can  take  place  only  if 
it  is  to  yield  a  surplus.2 

"Suppose  that  my  resources  are  15,000  francs  for 
this  year  and  15,000  francs  for  next  year  also,  and 
that  in  the  case  of  a  consumption  of  15,000  francs 
the  last  100  francs  spent  are  to  yield  me,  this  year  or 
next  indifferently,  a  utility  that  I  estimate  as  M.  The 
question  is  whether  I  shall  advance  1000  francs  for  a 
year.  I  should  have  to  reduce  my  well-being  [if 
I  did  advance  the  1000  francs],  this  year,  from 
M  +  M'  +  M"  +  .  .  .  ,  and  I  should  be  in  a  posi- 
tion to  increase  my  well-being,  next  year,  from 
Mi+M2+M3H-  .  .  .  Now  the  law  of  diminishing 
utility,  according  to  which  the  more  one  has  of  a  good, 
the  less  is  the  value  of  a  given  quantity  of  it,  —  this 
law,  precisely  because  it  is  applicable  to  all  other  goods, 
is  applicable  to  that  good,  of  quite  special  character, 

1  In  the  sense  of  advancing.  2  Rendement. 


OTHER   THEORIES  OF  INTEREST 


199 


which  is  called  money.  Using  our  money  to  the  best 
advantage,  we  shall  secure  for  ourselves,  with  successive 
equal  sums,  less  and  less  returns  of  satisfaction.  We 
have,  then, 

M"  >  M'  >  M  >  Mi  >  M2  >  M3  .  .  . 
and  hence 

M  +  M'  +  M"  +  .  .  .  >  M!  +  M2  +  M3  +  ... 

The  advance  of  which  I  spoke  will  become  possible 
only  if  it  is  to  yield  a  surplus  :  at  least  equal  to  the 
difference 

(M  +  M'  +  M"  +  .  .  .)  -  (Mi  +  M2  +  M3  +  .  .  .)• 

"If  it  were  a  question  of  advancing  2000  francs 
instead  of  1000  francs,  the  surplus 2  exacted  would 
have  to  be  more  than  doubled ;  for  to  the  series 
M  +  M'  +  M"  +  .  .  .  there  would  have  to  be  added 
ten  terms  all  greater  than  the  first  ten,  and  to  the  series 
Mi+M2+M3+  .  .  .  there  would  have  to  be  added 
ten  terms  all  smaller  than  the  first  ten.  As  the  sum  to 
be  capitalized 3  increased,  the  surplus  exacted  would 
have  to  increase  not  proportionally  but  acceleratively. 
Thus  diminishing  utility  acts  as  a  sort  of  check  to  capi- 
talizing 4 ;  and  the  greater  the  capitalization,  the  more 
powerful  its  action. 

"It  is  clear  how  closely  bound  together  are  the  con- 
siderations that  have  just  been  developed.  All  follow 
from  one  principle,  namely  that  the  best  way  to  dis- 

1  Rendement.  3  In  the  sense  of  advanced. 

2  Rendement.  4  In  the  sense  of  advancing. 


200  A  THEORY  OF  INTEREST 

tribute  one's  consumption  through  time  is  that  which 
makes  the  last  wants  satisfied  at  each  moment  of  the 
time  have  the  same  importance.  From  this  principle, 
which  I  shall  call  the  principle  of  the  equilibrium  of  the 
consumption,  the  following  conclusions  may  be  deduced : 

"•ist.  capitalizing  [advancing]  costs  the  capitalist  [cap- 
italizer  or  advancer]  nothing  when  it  tends  to  establish 
equilibrium  of  the  consumption; 

11  2nd.  capitalizing  [advancing]  costs  the  capitalist  [capi- 
talizer  or  advancer]  something  —  and  therefore  he  will 
decide  upon  it  only  in  case  he  is  sure  of  receiving  a  sur- 
plus thereby  —  when  it  destroys  the  equilibrium  of  the 
consumption,  or  when  it  aggravates  a  defect  of  the  equi- 
librium of  this  consumption. 

"But  capitalizing  [advancing]  tends  to  establish  the 
equilibrium  of  the  consumption  1 : 

"  (a)  when  wants  are  to  increase ; 

"  (6)  when  resources  are  to  decrease. 

"Capitalizing  [advancing],  on  the  other  hand,  destroys 
the  equilibrium  of  the  consumption,1  or  aggravates  a 
defect  of  equilibrium : 

"  (a)  when  wants  are  to  decrease ; 

"  (6)  when  resources  are  to  increase ; 

"  (c)  when  wants  and  resources  are  to  remain  the  same. 

"  If  we  regard  only  the  factors  that  check  capitalizing 
[advancing],  we  can  say  that  these  factors  may  be  re- 
duced to  one,  since  it  is  always  the  law  of  diminishing 
utility  which,  in  the  cases  enumerated  above,  causes 
the  'scarcity  of  capital,'  prevents  the  advancement  of 

1  The  word  in  the  text  is  "capitalisation,"  evidently  a  misprint  for 
"  consommation." 


OTHER   THEORIES  OF  INTEREST  201 

capital  except  with  the  assurance  of  a  surplus.  In  a 
certain  sense,  however,  we  are  right  in  saying  that  we 
have  three  causes :  sometimes,  indeed,  it  is  because  a  de- 
crease of  wants  upsets  the  equilibrium  of  the  consump- 
tion that  capitalizing  [in  the  sense  of  making  advances], 
aggravating  this  defect  of  the  equilibrium,  is  in  itself 
disadvantageous ;  sometimes  it  is  because  there  is  an  in- 
crease of  resources  that  capitalizing  is  disadvantageous, 
and  in  the  same  way;  sometimes,  finally,  capitalizing, 
instead  of  aggravating,  creates  the  defect  of  the  equilibrium 
of  the  consumption.  For  convenience  I  shall  say  hence- 
forth, in  speaking  of  these  three  causes,  the  decrease  of 
wants,  the  increase  of  resources,  and  the  sacrifice  of  capi- 
talizing [le  sacrifice  capitalistique]." 

§  96.  The  principle  which  Landry  thus  explains 
under  the  name  of  the  "  sacrifice  capitalistique "  may 
well  be  explained  again  briefly  in  different  words.  Sup- 
pose a  man  whose  wants  are  to  remain  the  same  next 
year  as  this  year  earns  $500  this  year  and  expects  to 
earn  the  same  next  year.  The  question  arises  whether 
he  shall  invest  $10  for  one  year.  If  he  does  so,  he  will 
have  for  consumption  this  year,  aside  from  any  interest 
that  he  may  receive  on  the  investment,  $490 ;  and  for 
consumption  next  year,  aside  from  interest,  $510.  This 
means  that,  aside  from  any  benefit  he  may  receive  from 
interest,  he  is  injured  by  the  transaction  to  just  the  extent 
that  the  wants  satisfied  by  the  last  $10  of  $510  are  less 
urgent  than  those  that  would  have  been  satisfied  by  the 
last  $10  of  $500.  The  transaction  involves  his  shifting 
the  expenditure  for  consumption  of  $10  from  a  time  when 
he  has  already  spent  only  $490  in  the  year  to  a  time  when 


202  A   THEORY  OF  INTEREST 

he  has  already  spent  $500  in  the  year,  and  when,  there- 
fore, so  far  as  the  shifting  is  concerned,  the  next  $10  is 
less  urgently  needed.  To  undertake  the  transaction, 
therefore,  involves  a  sacrifice,  the  "sacrifice  of  capitaliz- 
ing," the  sacrifice  caused  by  the  very  capitalizing  itself, 
the  "sacrifice  capitalistique."  Consequently,  says  Lan- 
dry,  a  man  will  not  normally  undertake  the  transaction 
unless  he  is  assured  of  a  surplus  for  doing  it,  which  sur- 
plus is  interest  or  at  least  an  element  of  interest.  This 
principle,  Landry  believes,  is  constantly  at  work,  no 
matter  what  the  relations  of  want  and  provision  at  the 
two  times  in  question ;  and  its  resultant  effect  is  bound 
to  be  to  help  maintain  a  positive  rate  of  interest. 

§  97.  Now,  plausible  as  this  reasoning  may  seem  at 
first,  it  is,  if  I  am  not  mistaken,  fallacious.  It  is  quite 
true  that  the  shifting  of  consumption  involved  in  capi- 
talizing may  often  require  the  sacrifice  Landry  points 
out.  It  may  be  admitted,  indeed,  for  the  sake  of  argu- 
ment, that  that  shifting  of  consumption  involves  the 
sacrifice  pointed  out  more  often  than  not.  But  that  by 
no  means  proves  that  this  "sacrifice  of  capitalizing"  is 
a  cause  of  the  persistence  of  a  positive  rate  of  interest. 
Why?  Because  a  corresponding  sacrifice  is  required, 
according  to  the  very  principle  pointed  out  by  Landry, 
by  the  shifting  of  consumption  involved  in  decapitalizing 
what  has  once  been  capitalized.  In  other  words,  though 
capitalizing  may  often  cost  the  capitalizer  something, 
unless  he  gets  a  surplus  through  it,  by  distributing  his 
consumable  income  unfavorably  in  time,  yet  decapitaliz- 
ing costs  the  capitalizer  something  just  as  often,  for  the 
same  reason ;  so  that  the  resultant  effect  of  the  principle 


OTHER  THEORIES   OF  INTEREST 


203 


would  seem  to  be,  not  to  reduce  the  total  amount  of 
advances  to  nature,  but  only  to  check  capitalizing  and 
decapitalizing  equally.  Just  as  it  is  a  disadvantage,  as 
Landry  points  out,  for  a  man,  for  example,  whose  income 
and  whose  needs  are  constant  to  give  up  the  consumption 
of  $10  when  he  has  spent  but  $490  in  the  year  in  order 
to  have  the  consumption  of  the  same  $10  when  he  has 
spent  $500  during  the  year,  so  it  is  a  disadvantage  also 
for  the  same  man,  after  having  once  capitalized  the  $10, 
to  give  up  the  consumption  of  $.30  per  year  for  33^ 
years  —  in  each  of  which  years  the  $  .30  is  in  addition 
to  a  constant  income  of,  say,  $500  —  in  order  to  consume 
$510  the  year  he  decapitalizes  and  only  $500  for  each  of 
the  32^  years  thereafter.1 

It  seems  to  me  that  the  principle  pointed  out  by 
Landry  has  as  much  effect  in  keeping  invested  in  ad- 
vances to  nature  what  is  once  invested  there  as  it  has 
in  preventing  them  to  begin  with.  And  if  that  is  true, 
the  principle  is  not  a  cause  of  the  persistence  of  interest. 

THE  MONOPOLY  THEORY 

§  98.  Some  writers  of  the  philosophical  anarchist 
school,  including  Proudhon  in  France  and  Benjamin  R. 
Tucker  in  the  United  States,  have  held  a  theory  of 
interest  which  is  fairly  summed  up,  I  think,  in  the  fol- 
lowing interpretation  of  it  by  a  Philadelphian  engaged 
in  the  banking  business. 

1  Here  I  am  considering  only  the  principle  pointed  out  by  Landry. 
For  other  reasons,  of  course,  which  I  have  explained  at  length  in  the 
previous  chapters,  it  may  be  of  advantage  to  a  man  to  exchange  $  .30 
a  year  for  33$  years  for  $10  at  present. 


204  A  THEORY  OF  INTEREST 

§  99.  "The  scientific  thinkers  of  this  school  hold 
that,  for  all  freely  reproducible  goods,  value  (and  its 
equivalent  price  when  the  thing  or  good  is  expressed  in 
terms  of  the  adopted  value  unit)  is,  in  a  normal  market, 
with  absolute  free  competition,  determined  by  both  final 
utility  and  marginal  cost.  The  term  'freely  repro- 
ducible' embraces  all  that  important  and  large  class  of 
staple  goods  and  necessaries  of  life  in  which  flexibility 
in  supply  exists,  which  are  the  rule  and  not  the  excep- 
tion in  a  free  market.  While  utility  must  be  accepted 
as  the  principle  which  creates  the  desire  and  originates 
value,  cost  of  production  at  the  margin  is  '  what  governs 
the  quantity  supplied  and  with  it  the  value  of  things.' 
In  the  case  of  'scarcity'  goods  (which  are  the  excep- 
tion and  not  the  rule  in  a  free  market) 'such  as  old  wine, 
oil  paintings,  etc.,  in  which  supply  is  fixed,  value  is 
determined  by  final  utility.  For  the  vast  quantity  and 
most  important  classes  of  goods,  then,  market  price 
will,  with  free  competition,  tend  always  to  settle  at  the 
cost  of  production  at  the  margin.  Supply  will  be 
adapted  to  demand. 

"Although  in  the  abstract  and  popular  sense  both  are 
included  in  the  term  'capital,'  for  clearness  in  exposi- 
tion a  distinction  is  made  between  capital-goods  and 
money.  We  have  consequently  to  treat  separately  of 
the  profit  on  capital-goods  and  the  interest  on  money, 
and  to  determine  what  it  is  that  causes  these  persistent 
incomes,  which  are  payments  for  impersonal  services,  to 
arise. 

"Capital-goods  are  not  only  tools,  machinery,  build- 
ings, and  other  aids  to  production,  but  also  goods  in 


OTHER  THEORIES  OF  INTEREST  205 

course  of  production;  in  short,  they  are  the  results  of 
past  labor  utilized  through  present  or  future  labor  to 
produce  consumable  commodities;  whereas  money, 
'which  can  never  be  used  in  the  act  of  production,  can- 
not be  capital  when  that  term  is  used  in  its  concrete 
sense.' 

"By  money  we  mean  that  'product  of  social  com- 
pact,' or  medium  of  exchange,  which  has  been  adopted 
by  common  consent  as  generally  acceptable  in  over- 
coming the  difficulties  of  simple  barter.  The  mediating 
of  exchanges  is  its  chief  function.  Anything  is  money 
which  fulfills  those  conditions.  Gold  as  money  has  long 
since  proved  utterly  inadequate  to  meet  the  growing 
demand  for  the  medium  of  exchange  necessary  for  the 
complex  and  tremendous  scale  on  which  modern  indus- 
try is  carried  on,  and  credit  money  has  been  introduced, 
until  today  for  every  dollar  of  gold  there  is  in  circula- 
tion about  eight  dollars  of  credit  money.  This  credit 
money  consists  of  treasury  notes,  bank  notes,  bank 
credits  circulating  through  checks,  etc. 

"Money  is  an  absolutely  indispensable  factor  in 
modern  production  and  exchange.  Without  it  a  return 
to  simple  barter  would  be  imperative,  and  our  advanced 
form  of  civilization  impossible.  Consequently  if  the 
supply  of  money  is  insufficient,  the  competition  for  it 
will  result  in  a  premium,  or  interest,  paid  by  borrowers 
for  its  use. 

"The  inadequate  supply  of  money  is  due  to  restric- 
tions imposed  by  law  on  the  issue  of  money,  which  pre- 
vents the  natural  adaptation  of  supply  to  demand. 
This  is  true  of  all  present  kinds  of  money  except  gold, 


206  A  THEORY  OF  INTEREST 

the  supply  of  which  is  restricted  by  nature.  Among 
the  several  legal  restrictions  is  the  national  tax  of  ten 
per  cent  on  state  bank  issues. 

"The  recompense  or  interest  on  money  loans  is  'de- 
termined in  the  market  by  the  same  process  which  deter- 
mines the  value  of  other  services.'  By  the  limitation 
of  supply,  money  is  made,  as  it  were,  similar  to  'scarcity' 
goods,  the  price  of  which  is  determined  by  the  utility  to 
the  user,  or  by  final  utility.  Thus  a  difference,  called 
interest,  constantly  exists  between  the  cost  of  issuing 
money  (that  is,  of  mint-stamping  the  gold,  or  preparing 
the  credit  notes,  etc.)  and  the  price  which  money  com- 
mands in  the  market.  We  do  not  here  refer  to  the  cost, 
or  the  value,  of  the  commodity  gold,  or  the  other  com- 
modities which  secure  the  credit  notes.  If  the  supply 
were  free  from  all  restrictions  (save  those  necessary  for 
redemption  and  validity),  supply  would  naturally  tend 
to  adapt  itself  to  demand,  as  in  the  case  of  freely  repro- 
ducible goods,  the  price  of  which  is  determined  by  cost 
of  production  at  the  margin. 

"There  is  no  valid  reason  why  a  greater  extension  of 
credit  money  could  not  readily  and  safely  be  introduced, 
secured,  both  primarily  and  secondarily,  by  deposit  of 
wealth  to  insure  redemption  in  the  unit  of  value,  which 
at  present  is  gold.  The  value  of  this  credit  money, 
redemption  assured,  would  correspond  to  the  value  of 
the  gold  and  could  not  possibly  fall  below  it,  even  were 
the  volume  largely  increased.  As  the  cost  of  issuing 
credit  money  will,  under  free  competition,  adjust  itself 
to  the  labor  of  preparing  the  tokens  and  handling  the 
loans,  in  other  words  as  price  will  conform  to  cost,  it 


OTHER  THEORIES  OF  INTEREST  207 

follows  that  the  portion  of  pure  interest  now  exacted 
for  money  loans  by  reason  of  the  scarcity  of  money  will 
be  eliminated. 

"At  present  only  certain  specified  and  limited  kinds 
of  wealth  can  legally  be  monetized,  and  the  result  is  an 
inadequate  supply  of  money  and  the  rise  of  interest. 
To  the  holders  of  this  privileged  wealth  the  holders  of 
all  other  kinds  of  wealth  are  obliged  to  pay  tribute 
before  they  can  enter  the  competitive  market.  The 
payment  of  interest  is  a  tax  levied  by  monopoly. 

"As  it  is  today,  a  bank  is  enabled  by  reason  of  the 
inadequate  supply  of  money  to  collect  pure  interest 
(that  is,  that  part  of  gross  interest  in  excess  of  charges 
for  labor  and  insurance)  for  a  service  which  consists 
merely  in  exchanging  its  known  and  widely  available 
credit  notes,  that  have  been  endowed  with  the  monetary 
privilege,  for  the  equally  good  but  unknown  and  un- 
available credit  notes  of  its  customers  which  are  not  so 
endowed.  In  all  business  loans  the  customer,  by  pledge, 
either  directly  or  indirectly,  of  wealth  or  capital,  secures 
the  bank,  so  that  it  is  not  capital  which  he  borrows  and 
for  which  he  pays  interest;  nor  is  it  capital  which  the 
bank  lends  and  for  which  it  obtains  interest.  The  trans- 
action is  merely  an  exchange  of  one  form  of  credit  for 
another,  the  only  difference  being  that  the  customer's 
credit,  though  equal  in  value  to  the  bank's  credit,  '  is 
by  law  disqualified  from  being  used  as  a  medium  of 
exchange.' 

"In  the  case  of  unsecured  loans  payment  is  for  risk, 
which  is  not  interest  but  insurance ;  but  where  there  is 
no  risk  there  can,  under  free  competition,  be  no  exaction 


208  A  THEORY  OF  INTEREST 

of  payment.  There  can  be  no  benefit  conferred  where 
there  is  no  burden  borne. 

"Capital  goods,  the  agencies  of  production,  are  what 
men  really  want  to  get.  But  as  money  is  essential  for 
the  transfer  of  these,  the  ability  to  obtain  money  at 
cost  secured  by  their  own  property  enables  them  to  buy 
capital  goods  and  thus  avoid  the  necessity  of  borrowing 
them. 

"Mr.  B.  R.  Tucker,  in  one  of  his  articles,  propounds 
the  following  problem :  - 

"  '  A  is  a  farmer  owning  a  farm.  He  mortgages  his  farm  to  a 
bank  for  $1000,  giving  the  bank  a  mortgage  note  for  that  sum  and 
receiving  in  exchange  the  bank's  notes  for  the  same  sum,  which 
are  secured  by  the  mortgage.  With  the  bank  notes  A  buys  farm- 
ing tools  of  B.  The  next  day  B  uses  the  notes  to  buy  of  C  the 
materials  used  in  the  manufacture  of  tools.  The  day  after  C  in 
turn  pays  them  to  D  in  exchange  for  something  that  he  needs.  At 
the  end  of  the  year,  after  a  constant  succession  of  exchanges,  the 
notes  are  in  the  hands  of  Z,  a  dealer  in  farm  produce.  He  pays 
them  to  A,  who  gives  in  return  $1000  worth  of  farm  products 
which  he  has  raised  during  the  year.  Then  A  carries  the  notes 
to  the  bank,  receives  in  exchange  for  them  his  mortgage  note,  and 
the  bank  cancels  the  mortgage.  Now,  in  this  whole  circle  of  trans- 
actions has  there  been  any  lending  of  capital  ?  If  so,  who  was  the 
lender  ?  If  not,  who  is  entitled  to  any  interest  ?  ' 

§  100.  "Having  determined  the  cause  of  interest  on 
money  loans,  and  how  such  interest  may  be  eliminated, 
we  now  turn  to  the  question  of  profits  on  capital  goods. 

"The  question  is  (to  use  the  words  of  another  to 
whom  the  present  writer  is  indebted  for  some  views  ex- 
pressed herein,  but  whose  name  is  purposely  omitted) : 
'Why  is  it  that  the  product  obtained  with  the  use  of 


OTHER  THEORIES  OF  INTEREST  209 

capital  exceeds  the  cost  of  production  and  thus  affords 
an  income  for  capital,  or,  in  short,  why  does  capital  get  a 
profit?' 

"As  has  been  stated,  the  value,  or  price,  of  freely  re- 
producible goods  is,  in  a  free  market,  regulated  by  the 
cost  of  production  at  the  margin.  This  necessarily 
results  in  the  intra-marginal  producer,  whose  cost  is 
lower,  reaping  a  profit.  We  are  forced  to  the  conclusion 
that  this  profit  is  due  to  an  advantage  which  the  intra- 
marginal  producer  possesses  over  the  marginal  producer. 
This  advantage  is  due  in  turn  to  the  interest  which  the 
marginal  producer  pays  on  money  loans.  The  marginal 
producer,  so  far  as  money  is  concerned,  is  obliged  to 
borrow  money  with  which  to  obtain  the  capital-goods 
employed  in  production.  The  intra-marginal  producer 
does  not  need  to  borrow.  The  producer,  therefore,  who 
is  free  from  debt,  or  the  intra-marginal  producer,  reaps 
a  profit  over  the  producer  who  is  obliged  to  borrow,  or 
the  marginal  producer,  corresponding  to  the  interest 
which  the  latter  must  pay  on  money  loans  equal  to  the 
capital  which  he  employs.  The  rate  of  interest  on 
money  loans  thus  tends  to  govern  the  rate  of  capital- 
profit,  is  indeed  the  cause  and  not  the  effect  of  capital- 
profit.  As  Mr.  Tucker  says,  'The  rate  of  interest  on 
money  fixes  the  rate  of  interest  on  all  other  capital  the 
production  of  which  is  subject  to  competition,  and  when 
the  former  disappears  the  latter  disappears  with  it.' 

"Interest  on  money  loans  is  paid  by  producers  because 
of  the  special  advantages  which  money  affords  as  a 
medium  of  exchange.  We  have  already  noted,  however, 
that  money  commands  interest  because  of  an  inade- 


210  A   THEORY   OF   INTEREST 

quate  supply,  due  to  legal  restrictions  which  keep  the 
supply  from  adapting  itself  to  the  demand.  Now,  with 
these  restrictions  removed,  all  producers  with  property 
or  credit  will  be  able  to  obtain  money  without  payment 
of  interest,  and  all,  therefore,  will  be  equally  at  the 
margin  so  far  as  money  is  concerned.  It  follows  that 
under  free  competition  no  persistent  profit  is  possible. 
What  may  be  called  'chance'  profits  may  arise,  but 
they  are  transitory  and  are,  in  the  average,  offset  by 
'chance'  losses.  The  price  of  freely  reproducible  goods 
will  tend  to  settle  at  the  cost  of  production  at  the  margin. 
Interest  on  money  loans,  being  eliminated,  can  no  longer 
be  included  as  an  element  of  cost  in  production,  and 
thus  cost  at  the  margin  will  be  merely  a  labor  cost. 
Competition  being  free,  final  utility  and  marginal  labor 
cost  will  become  equal  quantities.  When  interest 
vanishes,  the  entire  product  will  be  wages  (omitting  the 
question  of  rent). 

"Capital  is  an  aid  to  labor,  and  the  self-interest  of 
every  producer  induces  the  adoption  of  the  capitalistic 
or  indirect  method  of  production  because  it  yields  a 
larger  product.  This  is  a  great  incentive  for  the  saving 
and  investing  of  capital.  But  with  interest  charges  on 
money  it  is  unprofitable  to  use  more  than  a  limited 
amount  of  capital,  and  consequently  labor  is  only  par- 
tially benefited  and  employed.  Labor  does  not  reach 
its  maximum  efficiency  and  the  supply  of  capital  is 
thereby  limited.  It  is  manifest  that  by  an  increase  of 
capital  labor's  productivity  will  be  enhanced  and  the 
net  return  to  capital  diminished.  With  interest  on 
money  eliminated,  capital  will  be  in  more  abundant 


OTHER  THEORIES  OF  INTEREST  211 

and  cheaper  supply,  and,  as  a  result,  more  capital  will 
be  profitably  used,  until  all  labor  is  employed  at  its 
maximum  efficiency  and  the  supply  of  capital  in  con- 
sequence is  still  further  increased.  This  process  will 
continue  until  gradually,  under  the  force  of  free  com- 
petition, the  final  efficiency  of  capital  and  the  power  of 
capital  to  return  a  net  income  reach  the  vanishing  point. 

" '  If  I  were  free,'  says  Mr.  Tucker,  '  to  use  my  capital  directly 
as  a  basis  of  credit  or  currency,  the  relief  from  the  necessity  of 
borrowing  additional  capital  from  others  would  decrease  the  bor- 
rowing demand,  and  therefore  the  rate  of  interest.  And  if,  as 
the  Anarchists  claim,  this  freedom  to  use  capital  as  a  basis  of 
credit  should  give  an  immense  impetus  to  business  and  conse- 
quently cause  an  immense  demand  for  labor  and  consequently 
increase  productive  power,  and  consequently  augment  the  amount 
of  capital,  here  another  force  would  be  exercised  to  lower  the  rate 
of  interest  and  cause  it  to  gradually  vanish.' 

"Capital  is  scarce  and  in  inadequate  supply  because 
the  processes  of  production  and  exchange  are  hampered 
by  an  arbitrary  limitation  of  the  medium  of  exchange. 
Free  competition  is  interfered  with  and,  as  a  conse- 
quence, supply  is  not  adapted  to  demand.  The  prices 
of  freely  reproducible  goods  rule  above  labor  cost  of 
production  at  the  margin,  yielding  to  capital  a  persist- 
ent net  return  or  interest.  There  is  nothing  to  prevent 
this  interest  from  falling  to  zero,  provided  the  produc- 
tion and  accumulation  of  capital  are  not  discouraged. 

"The  conclusion  is  that  interest  arises  not  from 
economic  exigencies,  but  from  the  monopoly  of  money 
created  by  arbitrary  restrictions  on  the  supply  of  money 
imposed  by  the  state." 


212  A  THEORY   OF  INTEREST 

§  101.  This  theory  makes  all  interest  dependent  on 
loan  interest,  and  accounts  for  loan  interest  by  the 
scarcity  of  the  supply  of  credit  currency,  owing  to  gov- 
ernmental restrictions. 

Now,  as  I  have  shown  throughout  this  book,  natural 
interest  is  independent  both  of  loan  interest  and  of 
currency.  In  accounting,  indeed,  for  natural  interest, 
which  I  define  as  the  price  of  advances  to  nature,  I  did 
not  have  occasion  even  to  mention  currency  at  all. 
Yet,  strong  as  this  is  as  evidence  of  the  fallacy  of  the 
anarchists'  reasoning,  I  will  not  rely  on  it  only :  I  will 
try  to  point  out  some  of  the  fallacies  specifically. 

§  102.  In  his  fifth  paragraph  my  "extreme  liber- 
tarian" opponent  writes  that  "if  the  supply  of  money 
is  insufficient,  the  competition  for  it  will  result  in  a 
premium,  or  interest,  paid  by  borrowers  for  its  use." 
Let  us  analyze  this.  "Money"  may  mean  the  standard 
of  value,  or  the  legal  tender,  or  the  medium  of  exchange, 
or  any  combination  of  these. 

Now,  whatever  restricts  or  keeps  down  the  supply  of 
the  standard  of  value  makes  each  unit  of  that  standard 
of  value  more  valuable  relatively  to  all  other  things. 
But  what  effect  does  that  have  on  interest  ?  If  a  dollar 
is  very  hard  to  come  by,  say  as  hard  to  come  by  as  three 
bushels  of  potatoes,  then  of  course  it  means  three  times 
as  much  to  return  a  loan  of  a  dollar,  as  it  would  if  a 
dollar  were  no  harder  to  come  by  than  one  bushel  of 
potatoes.  But  exactly  the  same  is  true  of  lending  a 
dollar.  Whether  the  supply  of  the  dollar  as  standard 
of  value  is  much  restricted,  either  by  nature  or  by  law, 
therefore,  has  no  more  to  do  with  the  rate  of  interest 


OTHER  THEORIES  OF  INTEREST  21$ 

than  has  the  difference  between  a  larger  loan  and  a 
smaller  one. 

What  if  by  "  money  "  we  mean  "  legal  tender  "  ?  Well, 
it  is  possible  that  a  premium  may  be  paid  for  the  tem- 
porary use  of  what  the  law  requires  for  the  fulfilment  of 
a  contract  made  in  terms  of  money.  It  is  therefore 
true  that  the  need  of  money  to  carry  out  contracts  in 
accordance  with  the  requirements  of  the  law  may  oc- 
casionally add  to  the  interest  proper,  which  I  have  tried 
to  account  for  in  this  'book,  an  extra  premium  which  in 
business  circles  is  naturally  called  by  the  same  name, 
"interest."  But  interest  proper  would  persist,  for  the 
reasons  I  have  pointed  out,  even  if  this  occasional  extra 
premium  were  done  away  with  by  enlightened  legisla- 
tion. 

What  if  by  money  we  mean  the  mere  medium  of  ex- 
change ?  What,  in  that  case,  is  the  effect  of  restricting 
the  supply  of  money?  Undoubtedly  it  is  to  increase 
the  cost  of  production  generally,  for  the  medium  of  ex- 
change is  one  of  the  most  important  of  the  labor-saving 
instruments  of  production.  But  that  has  no  direct 
effect  on  the  rate  of  interest.  This  is  a  puzzling  point, 
requiring  the  most  careful  analysis.  It  is  true,  of 
course,  that  anything  which  increases  the  cost  of  pro- 
duction generally  must  on  that  account  decrease  the 
amount,  as  measured  objectively,  of  the  services  men 
will  advance  to  nature.  And  at  first  thought  it  must 
seem  almost  certain,  according  to  my  own  theory  as 
expressed  in  §§  62  and  66,  that  whatever  decreases  the 
objective  amount  of  the  services  advanced  to  nature 
must  raise  the  rate  of  interest.  But  in  that  reasoning 


214  A  THEORY  OF  INTEREST 

there  is  a  subtle  error.  Consider  the  meaning  of  Dia- 
gram IV  (§  61)  once  more.  There  the  distance  LV 
measured,  not  an  amount  of  objective  services  embodied  in 
advances  (to  nature),  but  an  amount  of  advances  (to 
nature).  Advances  (of  any  kind),  however,  are  things 
of  three  dimensions  or  factors,  as  explained  in  §§  30  and 
31;  it  is  only  what  decreases  the  product  of  two  of  those 
factors  —  the  two  whose  product  is  the  nominal  value  of 
the  services  that  constitute  the  principal  of  the  advance 
-  that  raises  the  rate  of  interest ;  and  that  product  is 
not  necessarily  decreased  by  an  increase  of  the  general 
cost  of  production. 

§  103.  I  can  now  point  out  what  seems  to  me  the 
underlying  error  of  the  anarchist  theory  of  the  cause 
of  the  persistence  of  interest.  The  anarchist  theory 
confuses  the  price  of  money  with  the  price  of  an  advance 
of  money  or  goods  or  services.  It  is  of  an  advance  of 
money  —  or  of  other  goods  or  services  —  that  interest 
is  the  price.  The  anarchist  argument  quoted  above 
does  not  concern  itself  at  all,  it  will  be  noticed,  with  the 
price  of  advances :  it  concerns  itself  only  with  the  price 
of  money  itself.  The  same  criticism  may  be  made  of 
any  other  anarchist  argument  on  interest  that  I  know. 

§  104.  Before  passing  from  this  anarchist  theory  of 
interest  I  should  give  due  attention  to  Tucker's  clever 
problem  in  the  thirteenth  paragraph  of  the  banker's 
explanation.  Whether  that  problem  has  ever  been 
solved  or  not  I  do  not  know.  But  it  is  a  fair  problem, 
as  well  as  a  cleverly  conceived  one,  and  I  shall  try  to 
solve  it  fairly. 

Analyze  the  series  of  transactions.     Beginning  with 


OTHER  THEORIES  OF  INTEREST 


215 


the  first  transaction  and  going  through  the  series,  which, 
we  are  told,  occupied  a  year's  time,  we  find  that 

A  gives  nothing  (his  note  only)  and  gets  "  farming  tools." 

The  bank  gives  nothing  and  gets  nothing. 

B  gives  "  farming  tools  "  (its  notes  only)  and  gets  "  materials." 

C  gives  the  equivalent  of  $1000  and  gets  the  equivalent  of  $1000. 

D  gives  the  equivalent  of  $1000  and  gets  the  equivalent  of  $1000. 

Etc. 

Etc. 

Z  gives  $1000  and  gets  "  farm  products." 

A  gives  "  farm  products  "  and  gets  nothing  (the  bank's  notes 
only). 

The  bank  gives  nothing  (A's  note  only)  and  gets  nothing  (its 
own  notes  only)  unless  it  gets  interest. 

Note  that  in  each  of  these  transactions,  except  the 
first  and  the  next  to  last,  what  occurs  is  merely  the  ex- 
change of  something  for  something  else  deemed  equiva- 
lent. And  note  that  the  first  and  the  next  to  last,  taken 
together,  amount  simply  to  this,  that  A  has  the  use 
throughout  the  year  of  goods,  to  the  value  of  $1000, 
which  he  does  not  own  till  the  end  of  the  year. 

Now  Mr.  Tucker  asks  whether  in  this  whole  circle  of 
transactions  there  has  been  any  lending  of  capital.  Cer- 
tainly there  has.  The  person  lent  to  is  obvious  enough  : 
he  is  A.  If  there  has  been  any  lending,  asks  Tucker, 
"Who  was  the  lender?"  The  lender  is  not  obvious  at 
all,  but  he  is  there  just  the  same.  For  one  day  B  is  the 
lender,  for  one  day  C,  and  so  forth :  each  man  who  ac- 
cepts the  bank-notes  of  $1000  in  exchange  for  goods  is  a 
lender  of  goods  to  that  value  from  the  time  he  hands 
over  the  goods  for  the  notes  until  the  time  that  he  hands 
over  the  notes  to  somebody  else  for  other  goods. 


2l6  'A  THEORY  OF  INTEREST 

And  now  we  come  to  Tucker's  last  question  :  "Who  is 
entitled  to  any  interest?"  I  reply  that  the  people  who 
are  entitled  to  interest  are  all  those  who  have  done  the 
lending  or  advancing,  that  is,  everybody  from  B  to  Z 
and  A.  "Well,  then,"  Mr.  Tucker  might  reply,  "if 
they  are  entitled  to  the  interest,  why  do  they  go  without 
it,  and  why  does  the  bank  get  it  ?  "  I  answer  that  they 
do  not  go  without  it,  if  they  are  good  business  men,  ex- 
cept for  the  very  short  periods  of  time  between  the  sale 
of  goods  for  $1000  and  the  purchase  of  other  goods  for 
$1000,  and  that  their  motive  for  foregoing  the  interest 
for  even  so  short  a  time  is  to  secure  instead  the  pre- 
sumably greater  advantage  of  making  the  exchange  of 
one  lot  of  goods  for  the  other  lot,  in  which  exchange  the 
bank-notes  perform  a  useful  service. 

At  this  point  in  the  argument  Mr.  Tucker  would  doubt- 
less want  to  ask  what  right  the  bank  has  to  appropriate 
the  interest  which  has  been  earned,  according  to  my  view, 
by  the  many  traders.  The  answer  is  not  far  to  seek : 
the  bank  performs  for  the  very  traders  who  earn  the  in- 
terest in  question,  not  only  the  service  of  substituting 
its  notes  for  A's  note  so  as  to  make  A's  credit  available 
for  use  as  currency  by  men  who  would  not  know  whether 
A's  note  itself  is  good  or  not,  but  also  various  other  ser- 
vices which  the  bank  must  perform  in  order  to  secure  the 
patronage  that  makes  possible  its  securing  of  the  inter- 
est in  question ;  and  for  these  services  all  together  the 
interest  in  question  is  just  about  reasonable  payment. 
If  it  were  more  than  reasonable  payment,  more  and  more 
persons  would  flock  into  the  banking  business,  and  more 
and  more  inducements  would  be  offered  by  banks  to  the 


OTHER  THEORIES  OF  INTEREST  217 

public  to  secure  their  patronage,  until  the  returns  from 
banking  would  be  just  about  what  the  same  labor  and 
capital  could  command  in  other  enterprises.  Thus  it  is 
arranged,  as  the  result  of  laws  and  customs  which,  though 
faulty,  no  doubt,  are  nevertheless  founded  on  the  lessons 
of  experience  and  not  altogether  bad,  that  the  bank 
goes  on  performing  the  service  in  question  and  pays 
itself  therefor  with  the  interest  which,  as  interest,  is, 
accurately  speaking,  earned  by  the  traders  who  are  bene- 
fited by  the  bank's  services.  The  reason  why  this  ar- 
rangement works  tolerably  well  is  that  the  bank's  services 
roughly  correspond  in  value  to  the  amount  of  interest  it 
can  appropriate  in  return  for  performing  them.  The  ar- 
rangement is  not  perfect,  but  it  is  by  no  means  so  mon- 
strous as  the  Anarchists  think.  It  would  be  monstrous, 
of  course,  if  the  opportunity  to  engage  in  banking  were 
not  freely  open  on  the  same  conditions  to  all  reputable 
persons ;  but  that  is  not  the  case. 

§  105.  I  can  easily  imagine  the  denunciations  that 
will  be  uttered  against  me  by  some  Anarchists  and 
Socialists  who  disagree  with  me  in  regard  to  the  whole 
problem  of  interest.  To  such  persons  let  me  say  here 
that  I  am  not,  as  they  might  suppose,  hostile  to  their 
hopes  and  aspirations,  but  on  the  contrary  very  friendly : 
I  differ  from  them  simply  in  opinion,  after  striving,  long 
and  hard,  to  discover  and  to  express  the  truth.  And, 
after  all,  it  is  only  by  doing  just  that  fearlessly  that  men 
can  hope  to  get  rid  of  their  differences.  For,  violently 
as  they  may  disagree  as  they  struggle  towards  the  truth, 
it  is  only  on  the  truth  itself  that  men  can  come  to  perma- 
nent agreement. 


CHAPTER  VIII 

INTEREST  IN  RELATION  TO  WAGES  AND  RENT 

§  106.  We  have  seen  that  the  indispensable  condition 
of  the  nominal  surplus  called  interest  is  the  bearing  of 
a  cost  by  the  advancer.  Interest  is  just  as  truly  earned, 
therefore,  by  the  advancer  who  causes  it  by  advancing 
services  equitably  belonging  to  him,  as  wages  are  earned 
by  the  hand-laborer  or  the  brain-laborer. 

But  this  is  not  saying,  it  should  be  noticed,  that  all  the 
interest  received  by  a  Carnegie,  a  Rockefeller,  or  a  Duke 
of  Westminster  is  necessarily  earned  by  the  man  who 
receives  it.  A  great  part  of  the  capital  of  such  men, 
though  belonging  to  them  legally,  does  not  belong  to 
them  equitably.  I  mean  that  a  great  part  of  it  came  to 
them  neither  as  gifts  from  those  who  equitably  owned  it, 
nor  as  the  earnings  of  their  own  labor,  nor  as  the  earnings 
from  their  own  advancing  of  what  was  equitably  their 
own,  but  as  income  from  privileges.  By  this  word 
"privileges"  I  mean  simply  titles  (to  income)  which,  how- 
ever honorably  or  however  dishonorably  acquired,  — 
and  in  the  case  of  some  men  of  vast  wealth  they  were 
acquired,  so  far  as  the  individuals  in  question  were  con- 
cerned, honorably,  —  would  not  have  gone  to  them  if  the 
laws  and  usages  of  society  had  been  in  accordance  with 
the  principles  of  justice  as  now  conceived  by  the  leading 

218 


INTEREST  IN  RELATION  TO  WAGES  AND   RENT       219 

economists.  To  put  it  more  concretely,  I  mean  by  privi- 
leges such  things  as  titles  to  the  valuable  services  of  land 
sites  the  value  of  whose  services  is  due  only  infinitesi- 
mally  to  their  owner  and  chiefly  to  the  good  citizens  of 
the  entire  community ;  I  mean  such  things  as  unearned 
exceptional  advantages  in  the  use  of  ores  or  oil  that  no 
man  made,  or  in  the  use  of  railroad  rights  of  way  that  the 
whole  public  contributed  to  set  aside  for  common  uses ; 
and  I  mean  by  privileges  such  things  as  the  power  to 
charge  buyers  prices  higher  than  they  would  have  to 
pay  if  free  to  buy,  without  customs  duty  restrictions, 
of  any  seller  they  pleased. 

With  my  meaning  clearer,  perhaps,  now,  I  repeat 
that  any  one  who  causes  the  nominal  surplus  called  in- 
terest by  advancing  services  that  belong  to  him  not  only 
legally  but  equitably,  earns  that  interest  as  truly  as  a 
laborer  earns  his  wages.  And  if  this  be  true,  interest 
and  wages  should  be  classed,  from  one  point  of  view, 
as  the  coordinate  kinds  of  the  general  class,  earned  in- 
come. 

§  107.  We  now  have  to  consider  the  relation  of  in- 
terest to  rent. 

First,  then,  what  do  we  mean  by  rent?  The  word 
"  rent,"  besides  being  used  in  several  senses  in  popular 
speech,  has  been  used  in  several  others  in  the  writings  of 
leading  economists.  For  many  years  its  accepted  sense 
among  economists — made  famous  by  Ricardo — was  that 
of  income  accruing  to  the  owner  of  land  in  his  capacity  as 
owner  merely,  without  labor  on  his  part.  Between 
Ricardo's  time  and  ours  the  costlessness  of  the  income 
accruing  to  landlords  thus  was  strongly  emphasized  by 


220  A  THEORY   OF  INTEREST 

Mill,  Henry  George,  and  many  other  writers  interested 
in  the  cause  of  social  justice,  and  a  tendency  grew  up  to 
think  of  costlessness  as  the  very  essence  of  anything 
that  is  to  go  by  the  name  of  rent,  and  therefore  to  ex- 
tend the  use  of  the  word  to  any  costless  income  whatever. 
This  tendency  is  deplored  by  Professor  Fetter,1  who  con- 
siders that  "the  essential  thought  in  rent  ...  is  that  it 
is  the  value  of  the  usufruct  as  distinguished  from  the 
value  of  the  use-bearer  or  thing  itself."  2  Which  of  these 
two  meanings  of  the  word  deserves  to  prevail  is  a  ques- 
tion on  which  I  do  not  need  to  argue  in  the  present  in- 
quiry. There  is  much  to  be  said  for  the  first,  and  doubt- 
less there  is  something  to  be  said  for  the  second.  It 
must  be  admitted  that  a  brief  name  for  all  costless  or 
unearned  income  is  to  be  desired,  and  that  the  word  "  rent " 
is  well  fitted,  by  its  long  association  with  the  unearned 
income  from  land,  to  serve  in  that  capacity.  On  the 
other  hand,  doubtless  the  distinction  made  by  Professor 
Fetter  is  of  some  importance ;  and  the  word  "  rent "  is 
well  fitted  by  its  commonest  non-scientific  uses  to  serve 
in  keeping  that  distinction  clear.  But  for  my  present 
purpose,  which  is  to  analyze  the  difference  between  in- 
terest and  rent,  I  shall  assume  that  by  rent  is  meant 
privileged  or  unearned  income,  whether  from  land  or 
from  any  other  source. 

Taking  rent  in  that  sense,  we  find  that  interest,  which 
from  one  point  of  view  we  classed  as  coordinate  with 
wages  as  an  earned  income,  is  to  be  classed,  from  the  same 

1  Chapter  VIII  of  his  Principles  of  Economics,  The  Century  Co.,  N.Y., 
1907. 

2  The  same,  p.  55. 


INTEREST  IN  RELATION  TO  WAGES  AND   RENT       221 

point  of  view,  as  the  antithesis  of  rent :  whereas  interest 
is  an  earned  income,  rent  is  an  unearned. 

§  108.  But  there  are  other  points  of  view  from  which 
interest  should  be  compared  with  wages  and  rent.  Wages 
are  not  dependent  on  any  other  sort  of  income,  and  they 
arise  independently  of  laws  and  customs.  Most  rent  is 
dependent  on  wages  or  interest,  being  in  fact  merely  the 
wages  of  the  public's  labor  and  the  interest  from  the  pub- 
lic's investments  to  which  inequitable  laws  and  customs 
permit  individuals  to  get  title;  the  only  rent,  indeed, 
that  can  reasonably  be  said  to  be  not  dependent  on  wages 
or  interest  is  the  income  arising  from  the  outright  gifts 
of  nature ;  and  all  rent  is  the  creature  of  laws  and  cus- 
toms. All  interest  is  dependent  either  on  wages  or  on 
rent,  that  is,  either  on  what  the  advancer  has  earned 
or  on  what,  though  he  does  advance  it,  he  has  not  earned ; 
but  interest  is  like  wages  in  that  it  appears  and  persists 
without  the  least  help  from  laws. 

§  109.  In  connection  with  these  distinctions  it  is 
interesting  to  recall  the  errors  in  respect  to  interest  made 
by  the  Anarchists  and  the  Marxians,  and  to  point  out 
an  error  made  by  many  of  the  Single  Taxers. 

The  Anarchists  make  the  mistake  of  attacking,  as  the 
creature  of  government,  " interest,"  whereas  the  abhor- 
rent creature  of  government  that  they  should  attack 
is  the  quite  different  income  that  I  am  calling  "rent." 

The  Marxians  make  the  mistake  of  denying  that  any 
interest  is  earned  by  the  advancer,  whereas  that  interest 
which  comes  in  to  the  advancer  as  the  result  of  his  ad- 
vancing what  he  had  really  earned,  his  wages,  is  as  truly 
earned  by  him  as  were  the  original  wages  themselves. 


222  A  THEORY  OF  INTEREST 

As  for  the  Single  Taxers,  many  of  them,  indeed  all 
orthodox  or  out-and-out  Single  Taxers,  make  the  mis- 
take of  confusing,  under  certain  circumstances,  the  in- 
terest that  they  profess  to  have  no  objection  to  with  the 
rent  that  they  so  zealously,  and  so  effectively,  attack. 
Consider  a  simple  case.  Here  is  Brown,  let  us  say, 
who  by  labor  has  earned  $1000.  With  the  money  he 
buys  a  lot  of  land  from  Smith,  who  bought  it  for  $100 
when  the  town  it  is  in  was  but  a  frontier  village.  The 
next  day  the  orthodox  out-and-out  Single  Taxers  have 
their  way,  let  us  suppose,  and  arrange  for  the  public  to 
take  as  a  tax  one  hundred  per  cent  of  the  rental  value 
of  the  lot.  They  defend  their  action,  before  you  pin 
them  down  to  close  reasoning,  by  saying,  in  effect, 
merely  that  the  value  of  the  use  of  the  lot  was  created 
by  the  public,  not  by  the  owner,  and  that  it  is  therefore 
right  for  the  public  to  take  that  value  for  itself.  But  it 
is  clear  that  the  person  who  has  got  the  benefit  of  all  this 
value  created  by  the  public  is  not  Brown  at  all,  but 
Smith.  For  Smith  has  in  his  pocket  the  $1000  that 
represents  the  sum  of  all  the  future  services  of  the  lot, 
discounted  at  the  current  rate  of  interest;  and  nine 
tenths  of  that  amount  is  to  him  rent,  unearned  income. 
And  Brown,  though  he  has  title  to  all  the  future  ser- 
vices of  the  lot,  got  their  full  present  value  by  earning  it. 

The  mistake  of  the  out-and-out  Single  Taxers  here 
consists  in  regarding  Brown  as  a  receiver  of  rent,  in  the 
sense  in  which  I  am  using  the  word,  merely  because  he 
receives  an  income  derived  immediately  from  land. 
Unless  the  lot  appreciates  in  value  after  Brown  acquires 
it,  Brown  receives  from  it  no  rent,  in  the  sense  of  income 


INTEREST  IN  RELATION  TO  WAGES  AND   RENT       223 

not  earned  by  him,  at  all,  and  Smith  and  his  predecessors 
have  already  received  all  of  it.  Except  in  so  far  as  the 
lot  may  go  on  appreciating  in  value,  therefore,  the  horse 
has  been  stolen  already.  The  income  Brown  receives 
from  the  lot,  if  he  receives  no  more  than  he  paid  for  (that 
is,  if  the  lot  does  not  appreciate  in  value),  is  simply  its 
services  which  he  bought  of  Smith  at  their  discounted 
present  value.  So  far  as  he  is  concerned,  therefore,  his 
whole  income  from  the  lot  in  such  a  case  is  nothing  but 
interest. 

I  am  aware  that  orthodox  Single  Taxers  seek  to 
justify  their  program,  when  pressed  by  such  argu- 
ments as  these,  by  the  plea  that  its  benefits  to  the  com- 
munity will  be  so  great  and  so  widespread  that  even 
the  Browns  will  on  the  whole  be  better  off  for  it.  Grant- 
ing, for  the  sake  of  the  argument  at  least,  that  this  is 
true,  it  is  not  a  sufficient  defence  of  the  program. 
The  undoubted  immediate  injury  to  the  Browns  from 
the  adoption  of  the  full  Single  Tax  program  should 
be  borne  not  by  them  only,  but  by  the  entire  community ; 
for  it  is  the  entire  community  that  must  be  held  re- 
sponsible for  the  legal  institutions  which  give  the  un- 
earned income  to  the  Smiths,  whether  they  keep  the  titles 
to  their  lots  or  sell  them,  and  which  amount  to  a  guaran- 
teeing of  those  titles  to  the  Browns  who  may  buy  them 
innocently  with  money  truly  earned. 

"What,"  exclaim  the  orthodox  Single  Taxers,  "you 
would  buy  out  the  present  owners  of  land  titles?"  I 
certainly  would.  There  is  no  organization  in  this  coun- 
try, so  far  as  I  know,  that  stands  for  this  program. 
The  orthodox  Single  Taxers,  who  might  be  expected 


224  A  THEORY  OF  INTEREST 

to  favor,  spurn  it.  And  that  the  "practical"  but  rela- 
tively inequitable  program  of  the  orthodox  Single 
Taxers  will  probably  prevail  over  it  I  must  admit.  But 
it  is  the  right  program  nevertheless.  It  is  the  right 
one,  primarily,  because  it  is  the  only  one  that  accords 
with  the  highest  justice  we  can  conceive  in  the  matter 
with  our  present  knowledge.  It  is  the  right  one,  second- 
arily, because  it  is  the  least  costly  to  society.  All  the 
land  titles  in  this  country  can  be  bought  "on  the  in- 
stallment plan"  by  payments  not  exceeding  the  value, 
above  their  present  market  prices,  of  the  titles  to  the  public. 
And  even  if  they  could  not  be  bought  without  the 
bearing  of  a  positive  economic  burden  by  the  com- 
munity, they  should  be  bought  nevertheless;  for  there 
are  other  burdens  besides  economic  burdens  to  be  con- 
sidered. How  much  did  the  Civil  War  cost  this  country, 
not  only  economically  but  vitally  and  morally,  in  com- 
parison with  the  cost  of  buying  the  freedom  of  every 
slave  ? 

CONCLUSION 

§  no.  This  completes  the  outline  of  my  theory  of 
interest.  Some  mistakes  will  doubtless  be  found  in  it ; 
and  even  if  found  to  be  true  in  the  main,  it  will  be 
greatly  developed  by  later  writers.  But  it  is  as  nearly 
true,  and  as  complete  in  essentials,  as  I  could  make  it 
without  postponing  its  publication  too  long.  I  hope  it 
will  do  good,  especially  in  eliminating  from  party  Social- 
ism —  much  of  the  spirit  and  some  of  the  tenets  of  which 
society  should  adopt  —  a  grave  economic  error  that 
threatens  seriously  to  pervert  it. 


INDEX 


Words  printed  in  italics  are  technical  terms,  and  in  most  cases  they  are  more  or 
less  formally  defined  on  the  pages  the  numbers  of  which  immediately  follow 
them. 


Advance,  49,  47-49,  three  ways  of 
making  an,  49-52  ;  to  be  distinguished 
from  what  is  advanced,  49,  56-57 ; 
not  always  embodied  in  discrete  ob- 
jects, 63-64.  Advance  to  persons,  52. 
Advance  to  nature,  52,  50-51 ;  signifi- 
cance of,  for  theory  of  interest,  52- 
53  ;  represented  in  Figures  I  and  II 
(p.  48)  and  in  Diagram  III  (p.  91); 
value  of,  61-63 ;  cost  of,  64-66;  sup- 
ply of,  66-68;  point  of  contact  of, 
with  consumption,  103-104.  Rela- 
tion of  advances  to  persons  to  advances 
to  nature,  52-53,  58-60.  Relation  of 
same  to  loan  interest  and  to  natural 
interest  respectively,  54-55. 

Anarchists,  vi-vii,  203-211,  217,  221. 
See  also  Tucker,  Proudhon,  and 
Monopoly. 

Aristotle,  i. 

Ashley,  W.  J.,  178. 

Banking  facilities  and  rate  of  interest, 

III-II2. 

Bastiat,  F.,  189. 

Bible.     See  Mosaic  law. 

Bohm-Bawerk,  E.  von,  author's  obli- 
gations to,  viii,  2  n. ;  inadequate 
definition  of  principal  by,  7-8,  7  n. ; 
definition  of  value  in  terms  of  margi- 
nal utility,  27-32;  "differences  in 
want  and  provision  for  want,"  117- 
123;  "underestimation  of  future 
pleasures  and  pains,"  123-124; 
"technical  superiority  of  present 
goods,"  124-146  (esp.  144). 

Boninsegni,  P.,  on  "ophelimity,"  43~4°- 


Carver,  T.  N.,  definition  of  value,  9, 
9  n. ;  theory  of  interest,  157-150- 


Cassel,  G.,  i  n. 

Cause,  32-33 ;  causal  relations  between 

value  and  cost,   21-25;    number  of 

causes  of  rate  of  interest,  105-107. 
Changing  market,  17—19. 
Commodity,  13.     See  Good. 
Consumption,  point  of  contact  of,  with 

making  advances  to  nature,  103-104; 

increased,  in  relation  to  quality,  177. 
Cost,  19;    determined  by  two  factors, 

19;    kinds  of,  19-20;    personal,  19; 

market,  19;    nominal,  20;    equation 

'of  value  and,  at  margin,  21-23. 
Crusoe,  natural  interest  may  accrue  to, 

88-89,  82 ;   interest  accruing  to,  not 

to  be  defined  in  terms  of  price,  55-56 ; 

formula  for  rate  of  interest  in  case  of, 

89. 

Davenport,  H.  J.,  definition  of  value, 
10,  10  n. 

"Depend,"  "dependent  on,"  and  other 
words  involving  conception  of  cause, 
26-33. 

"Differences  in  want  and  provision  for 
want"  as  cause  of  interest  (Bohm- 
Bawerk),  117-123. 

Discount,  86,  5,  9,  86-87,  185,  1041 
formula  for,  87  ;  rate  of,  87. 

Dishonesty,  relation  of,  to  rate  of  inter- 
est, III-II2. 

Distribution   in    relation   to   subjective 

factors  of  value,  25. 
"  Durable  consumption  goods,"  5-6,  55. 

Earned  and  unearned  incomes,  vi,  157, 
172-173,  177-178,  218-221. 

Estimation  of  advancer,  65,  71-72.  and 
passim.  See  also  Improvidence  and 
Underestimation. 


225 


226 


INDEX 


"Exploitation"  theory,  as  expressed  by 
Marx,  159-170;  criticism  of,  170- 
175.  See  also  Marx  and  Socialists. 

"Fallacy    of    saving,"    176-178.    See 

Robertson. 
Fisher,  Irving,  2  n. 
"Fructification"  theory   (Turgot   and 

H.  George),  178-194;    criticism  of, 

193-194. 
"Future  goods"  and  "present  goods," 

need  of  exact  definition  of,  7-10. 

George,  Henry,  178-193;  his  theory  of 
interest,  185-193,  criticism  of,  193- 

194- 

Good,  13. 
Gossen,  H.  H.,  on  conception  of  the 

margin,  150;    on  bearing  of  time  for 

enjoyment  on  pain,  12  n. 

Heirs,  possible  influence  on  advancing 
of,  70-80;  connection  of,  with  rate 
of  interest,  108-109. 

Hours  of  labor,  not  related  to  rate  of 
interest  as  Marx  thought,  172. 

Improvidence,  relation  of,  to  interest, 
8-9.  See  also  Estimation. 

Interest,  cause  of,  5-6;  causes  of  nor- 
mal rate  of,  100-116;  secret  of  prob- 
lem of,  §§  43-47,  and  references  under 
Principal  and  Nominal  value;  in- 
dependent of  wage  system,  172-175  ; 
in  what  cases  it  must  be  conceived 
as  a  value  instead  of  as  a  price,  55-56. 
See  also  Natural  interest  and  Loan 
interest  and  Interest  problem. 

Interest  problem,  difficulty  of,  i-io, 
esp.  4-5 ;  importance  of  solution  of, 
v-vi;  secret  of,  73-85;  relations 
of,  represented  geometrically,  Chap- 
ter V  (esp.  Diagram  III)  (p.  91). 
See  also  Principal  and  Nominal 
value. 

Inventions,  6,  102-107,  109-110. 

Investment  in  consumption,  103-104. 

Justification  of  interest,  vi,  i,  157,  170- 
i7S»  176-178,  218-221. 


Labor,  13,  12-13. 

Labor-saving  instruments.     See  Tools. 

Land,  income  from,  in  relation  to  word 
rent,  210-221;  income  from,  in  rela- 
tion to  interest  according  to  Turgot, 
178-184." 

Landry,  A.,  2  n. ;  his  theory,  194-201 ; 
criticism  of,  201-203. 

Lassalle,  F.,  156. 

Life,  duration  of,  in  relation  to  the 
rate  of  interest,  108-109. 

Loan,  49. 

Loan  interest,  2,  3-4,  54. 

Macfarlane,  C.  W.,  i  n.,  41  n. 

Macvane,  S.,  156. 

Management,  efficiency  of,  and  profits, 
172. 

Marginal  utility,  a  term  not  needed  in 
economic  theory,  41,  26—27 ;  its 
place  taken  in  this  book  by  "  depend  " 
and  "dependent  on, "  26-27;  Bohm- 
Bawerk  on,  27-32.  See  Utility. 

Market.  See  Market  value,  Market  cost, 
Changing  market,  and  Market  in 
advances. 

Market  cost,  19.  See  also  Cost  and 
Value. 

Market  in  advances,  34,  71,  Diagram 
II  (p.  69),  Diagram  III  (p.  91),  and 
passim. 

Market  value,  16-17.     See  also  Value. 

Marshall,  A.,  156. 

Marx,  K.,  "Das  Kapital,"  3;  "aver- 
age rate  of  profit,"  3  ;  surplus  value, 
4 ;  his  theory  of  interest,  159  n.,  159- 
170;  criticism  of,  170-175.  See  also 
iS7>  177-178,  218-221,  and  references 
under  Socialists. 

Men  of  affairs,  interest  theory  of, 
3-4- 

Menger,  Carl,  158. 

Mill,  J.  S.,  his  definition  of  value,  9. 

Money  and  interest,  115,  212-217. 

Monopoly  and  profits,  172. 

Monopoly  theory,  203-211 ;  criticism 
of,  212-217,  221.  See  also  Anar- 
chists, Proudhon,  Tucker,  and  Mon- 
opoly and  profits. 

Mosaic  law  and  usury,  i. 


INDEX 


227 


Natural  capital,  63-64 ;  not  always  em- 
bodied in  discrete  objects,  63-64. 

Natural  interest,  3,  3  n.,  54-56 ;  more 
formally  denned,  82. 

Nominal  surplus  (same  as  interest),  76, 
82-85,  97,  148,  157,  I7I-I73,  176- 
177,  218 ;  in  relation  to  tools  and  ma- 
chines, 62-63. 

Nominal  value,  17-10;  subjective  factor 
of,  ig;  objective  factor  of,  19 ;  repre- 
sented geometrically,  48,  91,  in  con- 
nection with  definition  of  the  prin- 
cipal, 57-58;  of  advances  to  nature, 
61  n. ;  algebraic  equation  of,  74-75  ; 
geometrical  equation  of,  91,  95. 

Normal  (or  normally),  24,  23-24,  173  n., 
and  passim;  divergence  of  actual 
from  normal  conditions,  in  relation 
to  the  rate  of  interest,  m-ii6; 
normal  price,  34. 

"Objective  exchange  value,"  16  n. 

Objective  factor  of  cost,  15  ;  of  pleasure, 
14;  of  value,  15;  maybe  the  objec- 
tive factor  of  a  value  also,  20-2 1 . 

Ophelimity,  14  n.,  42-46.    See  Pareto. 

Pain,  1 1 ;  its  opposite,  1 1 . 

Pantaleoni,  M.,  12  n. 

Pareto,  V.,  on  ophelimily,  14  n.,  42-46. 

Patten,  S.  N.,  41  n. 

Pleasure,  1 1 ;  its  opposite,  1 1 ;  on  what 
dependent,  1 1 ;  dependent  on  both 
objective  and  subjective  factor,  13- 

15- 

Price,  34;  normal,  34,  theory  of,  34- 
40,  causes  of,  40,  of  advances,  47- 
89,  of  advances  represented  geomet- 
rically, 69,  91,  90-98. 

Principal,  49,  57-58,  7-10;  represented 
geometrically,  48,  91,  53-54;  ex- 
pressed algebraically,  73-75 ;  signifi- 
cance of  author's  definition  of,  for 
theory  of  interest,  76-77,  "7; 
hitherto  not  correctly  defined,  7-10. 

Privileges,  218-219,  173"-;  rent  de- 
fined as  income  from,  210-220. 

Productivity,  146,  4,  146-148. 

Profit,  in  wide  popular  sense,  17 in.; 
Marx's  definition  of ,  169;  relation  of, 


to  rent  and  interest  according  to 
Marx,  170;  "  aver  a  ge  rate  of,"  Marx's 
term  for  natural  interest,  3. 

Protective  tariff  system  and  other  causes 
that  prevent  producers  from  getting 
their  dues  in  real  wages,  179  n.,  219. 

Proudhon,  P.  J.,  203. 

Rate  of  Interest,  82 ;  formula  for  nor- 
mal, 85 ;  determined  primarily  in 
respect  to  advances  to  nature,  52-53 ; 
on  loans,  how  determined,  53,  84- 
85 ;  formula  for,  per  cent,  85 ;  rep- 
resented geometrically,  90-98 ; 
causes  of,  100-116;  actual,  as  modi- 
fied by  a  factor  of  risk,  114;  apparent, 
115;  cause  of  rise  of,  on  value  side, 
101-105,  on  cost  side,  107-109; 
cause  of  fall  of,  on  value  side,  107, 
on  cost  side,  109;  tendency  of,  at 
present,  109-110. 

Rent,  219-220;  Fetter  on,  220;  rela- 
tion of,  to  interest,  64,  220-224,  !73> 
173  n. ;  in  Turgot's  theory  of  inter- 
est, 178-185.  See  also  Rent  contract. 

Rent  contract  (same  as /ease),  40-50,  219- 
220;  Fetter  on,  220;  distinction  of 
interest  contract  from,  50.  See  also 
Rent. 

Risk,  factor  of ,  114-115. 

Robertson,  J.  M.,  176;  theory  of, 
criticized,  176-178. 

Roman  Catholic  Church  and  usury,  i. 

"Sacrifice  capitalistique,"  194-203. 

Saving,  "fallacy  of."     See  Robertson. 

Seager,  H.  R.,  41  n. 

Senior,  N.  W.,  his  "abstinence  theory," 
149-157. 

Services,  13. 

Single-Taxers,  221;  program  of  most 
radical  of,  confuses  interest  with  rent, 
222-224. 

Socialists,  views  on  interest  of,  3,  4,  6, 
150-175,  v-vii,  221,  156  (Lassalle), 
176-178. 

Socially  created  "values,"  private  ap- 
propriation of,  173  n.,  222-224. 

Subjective  factor  of  cost,  15. 

Subjective  factor  of  pleasure,  14. 


228 


INDEX 


Subjective  factor  of  value,  15,  16,  22; 
in  the  case  of  market  value,  16,  23,  73 ; 
in  the  case  of  comparative  personal 
and  market  value,  25 ;  in  the  case  of 
nominal  value,  19;  in  the  case  of 
comparative  personal  and  nominal 
values,  77-80.  See  also  43-46  and 
27-32. 

"Subjective  use  value,"  16  n. 

Substitution,  principle  of,  37,  37-38,  26- 
33;  Bohm-Bawerk  on,  27-32,  37. 

Surplus  value,  Marx's  theory  of,  163- 
165 ;  Marx's  theory  of  rate  of,  165- 
166.  See  Nominal  surplus. 

Tools,  61-63,  persistence  of  interest  not 

due  to,  5. 

Tucker,  B.  R.,  203,  208,  211,  214-216. 
Turgot,  A.  R.  J.,  178,  193;    his  theory, 

178-184;  criticism  of,  185,  193-194. 

"Underestimation  of  future  pleasures 
and  pains,"  as  a  cause  of  interest, 
123—124.  See  also  Estimation. 

Utility,  13 ;  its  dependence  on  a  sub- 
jective factor,  14 ;  not  the  right  word 


for  properties  measured  by  the  curve 
OR  in  Diagram  I  (p.  36),  41.  See 
Marginal  utility. 

Value,  15 ;  determined  by  two  factors, 
15;  specific  kinds  of,  16-19;  per- 
sonal, 16;  equation  of  personal  value 
and  personal  cost  at  margin,  74; 
market,  16-17;  nominal,  17-19; 
equation  of  cost  and,  at  margin,  21- 
23,  38;  correspondence  of  personal 
values  and  market  values,  16,  19-20, 
23-25,  38-39,  60,  70-71 ;  normal 
market,  34-39 ;  non-normal,  curve  rep- 
resenting, Diagram  I  (p.  36)  and 
page  42.  See  also  Nominal  value, 
Subjective  factor  of  value,  and  Objec- 
tive factor  of  value. 

Wage-system  and  interest,  172-175. 
Waiting,    156,    156-157;     productivity 

and,  157-158. 

Walker,  F.  A.,  on  value,  9,  9  n. 
Walras,  L.,  158. 

Want.     See  Differences  in  Want. 
Wicksteed,  P.  H.,  17  n. 


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